Ellington Financial Inc. (EFC) Q1 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial First Quarter 2019 Earnings Conference Call. Today’s call is being recorded. At this time, all participants have been placed in a listen-only mode; then, the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the call over to Jason Frank, Corporate Counsel and Secretary. Sir, you may begin.

Thank you. Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our annual report on Form 10-K filed on March 14, 2019, 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 JR Herlihy, 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 track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the endnotes at the back of the presentation. With that, I will now turn the call over to Larry.

Thanks, Jay, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. On our call today, I'll start with an overview of our first quarter. Next, our CFO, JR Herlihy will summarize our financial results. And then, Mark Tecotzky, our Co-Chief Investment Officer, will discuss our portfolio positioning and performance, recent market trends and what our investment outlook is going forward. Finally, I will provide some closing comments. And then, we'll open the floor to your questions. I'm extremely pleased with our performance during the quarter, Ellington Financial’s first quarter as a REIT. We had terrific contributions from both our diversified credit portfolio and our agency portfolio. We grew our net income, we generated core earnings in excess of our newly increased $0.42 per quarter dividend run rate and we produced an annualized economic return of 11.7%. We successfully executed on several notable transactions during the quarter, including a securitization of reperforming Irish residential loans, and the fourth Ellington-sponsored CLO, which was upsized due to strong investor demand. At the same time, we participated in the asset ramp-up for two additional planned CLOs, one in the U.S. and one in Europe. I'm exciting about the growth of our proprietary securitization businesses, which now include non-agency mortgage deals in both, the U.S. and Europe, as well as multiple successful CLOs. And our pipeline of future deal looks strong. We believe that these securitization businesses are differentiators for Ellington Financial and should continue to be important contributors to our earnings going forward. As usual, our credit strategies were the primary driver of earnings. Our strongest performing credit strategies for the quarter include residential non-performing loans, retained tranches in Ellington-sponsored CLOs, European RMBS, and CMBS. We also continued to benefit from excellent performance of our small-balance commercial mortgage loans, residential non-performing loans, non-QM loans, and consumer loans. Meanwhile, our agency portfolio also performed very well and was a significant contributor to our results this quarter. On our fourth quarter call, we spoke about how attractive we saw the opportunity in agency RMBS, following the December sell-off, and we acted on this view by significantly growing the size of our agency portfolio. That positioning really paid off in the first quarter, and we still see agency RMBS as attractively priced on both an absolute and relative basis. As Mark will discuss in greater detail, technical support for agency RMBS looks good and the low interest rate environment again creates lots of opportunities for us, especially in specified pools. Please turn to slide four in the presentation. Here, you can see the significant growth, 17% growth of the agency portfolio during the first quarter. We’re now closer to that 20% capital allocation to agencies that has historically been around the upper bound of our allocation range. Given how helpful for the agency portfolio is for our REIT test and on the rich opportunity set we’re seeing in the agency RMBS, I see this increased capital allocation to agencies as persisting at least in the near-term. Also on slide four, you can see that the size of our overall credit portfolio didn’t change much, but that doesn’t tell the whole story. We actually made substantial additions to our small balance commercial mortgage loan, non-QM loan and residential transition portfolios. But, when combined with the sales of non-REIT-qualifying assets related to the REIT conversion, the overall credit portfolio was up only slightly quarter-over-quarter. This quarter also marked a few notable firsts for Ellington Financial. We completed our first quarter as a REIT. We declared our first monthly dividend and we are reporting core earnings for the first time. Starting with the REIT conversion, I won’t go into too much more detail about our conversion, given how much air time we’ve given the topic on our past several calls, but I’ll just briefly reiterate the significant advantages we see in being a REIT rather than a publicly traded partnership. These include an expanded potential investor base, better liquidity for our stock, simplified tax reporting for shareholders as well a 20% REIT test deduction for domestic shareholders. And I’ll emphasize once again that as a REIT, we can maintain what have been our core investment and hedging strategies. So far, our stock price has spotted nicely to the conversion. We’re still trading at a slight discount to book value, so we clearly still have more work to do, but we’ve really come a long way. Next, we declared our first monthly dividend in March. Given that, we have always reported a book value on a monthly basis anyway, the shift to a monthly dividend was a natural one and should further enhance performance transparency. We believe that this will not only benefit our existing shareholders, but increase the breadth of our investor base. In making this move, we also increased our annualized dividend rate by about 2.5%, which reflects the continued steady growth of both our net interest income and our overall earnings power. And when you look at where our book value ended up for the quarter, keep in mind that we paid an extra dividend in March this quarter. So, that means that our earnings not only covered our final quarterly dividend, but it also covered it at extra monthly dividend as well. Finally, I’m pleased to be reporting core earning, as an alternative non-GAAP earnings metric. While this metric is comparable to the adjusted net investment income metric that we previously reported when we were a PTP, the additional presentation of and additional focus on core earnings is consistent with that of our peers, and as such, should help investors measure, evaluate and compare our operating performance and context. Given the strength and diversity of our portfolio, we believe that we are well-positioned to grow core earnings and the dividend from here. In fact, as also shown on slide four, this past quarter, our core earnings of $0.45 per share exceeded our dividend run-rate of $0.42 per share. We will closely monitor this relationship and we know that this may warrant an increase in our dividend at some point. With that I’ll turn the call over to our CFO, JR Herlihy to go through our financial results for the quarter in more detail.

Thanks, Larry, and good morning, everyone. You’ll notice that we are only showing current period financials in this quarter’s earnings release and the investor presentation. In connection with our REIT conversion, we are no longer applying investment company accounting, which we have done as a PTP and instead, we are using historical cost accounting, which is standard U.S. GAAP for REITs. The change from investment company accounting to historical cost accounting became effective as of January 1, 2019 in connection with our internal restructuring and intention to quality as a REIT for the year ending December 31, 2019. And this change is applied prospectively, or in other words, only to the current quarter and future quarters. As a result, the presentation of our financial statement is quite different for Q1 versus historical periods, and side by side comparisons may not be meaningful. So, in our 10-Q that we are planning to file later this week, you’ll see that prior period financial information will be shown separately. Importantly, despite the change from investment company accounting, we are continuing to elect the fair value option for all of our financial instruments as we’ve always done. As a result, there is no material impact to our earnings or NAV from the change. With that, please turn to slide six for a summary of our income statement. For the quarter ended March 31, 2019, EFC recorded GAAP net income of $15.4 million or $0.52 per share. GAAP net income during the first quarter included strong net interest income of $18.4 million, other income of $5.5 million, which includes net realized and unrealized gains and losses as well as in other income bucket that includes miscellaneous items such as origination fee income, and rental income from REO, expenses of $9.2 million and earnings from investments in unconsolidated entities of $1.8 million. Under historical cost accounting, we now report all earnings from our equity method investments in one net line item on the income statement. As Larry mentioned, beginning this quarter, we are reporting core earnings rather than adjusted net investment income. Core earnings for the first quarter was $13.3 million or $0.45 per share. Similar to adjusted net investment income, core earnings is non-GAAP financial measure that provides a proxy for operating performance for mortgage REITs by excluding gains and losses and certain other adjustments to help evaluate the effective net yield provided by a REIT’s portfolio. Please keep in mind that while we view core earnings as a good proxy for our earnings power, it does have its limitations. As a portion of our capital, we’ll also be invested in turning assets that we hold for capital appreciation as opposed to generating current core earnings. In addition, core earnings does not capture much of the total return that we generate with our opportunistic trading. Please turn to slide seven for details on the attribution of earnings between our credit and agency strategies. In the first quarter of 2019, the credit strategy generated gross income of $16.5 million or $0.54 per share while the agency strategy generated gross income of $5.4 million or $0.18 per share. In the credit strategy, total net interest income was $18.2 million, net realized and unrealized gains were $7.4 million, and earnings from investments in unconsolidated entities were $1.8 million, as successful securitization activity and tightening yield spreads and many credit factors that drove gains. The majority of the net realized and unrealized gains in the credit strategy came from Ellington-sponsored CLOs, secondary CLOs, CMBS, non-performing residential loans, and European RMBS, while we had underperformance from our investments in loan originators. Credit hedges and other activities generated a loss of $6.6 million. Other investment related expenses decreased to $3.5 million this quarter from $5.5 million in the prior quarter, primarily because last quarter’s number included deal costs from the non-QM securitization completed in November 2018. In the agency strategy, declining interest rates and tightening yield spreads on many RMBS generated net realized and unrealized gains on our agency assets of $13.3 million, while net interest income totaled $1.6 million. These gains were partially offset by losses on our interest rate hedges and other activities of $9.5 million. As Mark will discuss, the excellent performance of our specified pools, drove results in this strategy for the quarter. Turning next to slide eight. At year-end, you can see that the size of the credit portfolio slightly increased sequentially to $1.2 billion. Consistent with prior quarters, these totals are quoted before consolidating the non-QM securitization trusts. As Larry mentioned, the small net change in the overall size of the credit portfolio does not reflect the significant volume of buying and selling that occurred as we further rotated capital through requalifying assets during the quarter. Specifically, as you can see here, the size of our residential loans in REO portfolio and of our CMBS and commercial loans in REO portfolio, each grew quarter-over-quarter, while our CLO and non-dollar-denominated portfolio shrank. Our non-agency RMBS bucket also declined in the first quarter. These portfolio changes were consistent with the plan that we articulated on last quarter’s call. Turning to slide nine, you can see that while our long agency portfolio grew 17% quarter-over-quarter, the asset mix was essentially unchanged. Next, please turn to slide 10 for a breakdown of our borrowings and leverage. At quarter-end, we had a total debt-to-equity ratio of $3.44 to 1 compared to 3.36 to 1 last quarter. The higher debt-to-equity ratio is the result of the growth of our agency portfolio where we’re comfortable taking more leverage because of the high liquidity of the assets and where leverages is less expensive than for credit strategies. Additionally, as of March 31st, we had approximately $145 million of unsettled agency RMBS purchase; had the anticipated financings of these investments been included in borrowings as of March 31st, our debt-to-equity ratio would have been 3.62 to 1. For the first quarter, our total G&A expenses were $5.7 million, up from $4.7 million last quarter, the primary driver of the increase was REIT conversion costs, which were $1.1 million in Q1 compared to $615,000 million in the previous quarter. In total, we have incurred about $1.9 million of expenses associated with the REIT conversion through March 31, 2019 with an additional estimated $250,000 remaining or less than a penny per share. Excluding the costs associated with the REIT conversion, our annualized expense ratio for the quarter was 3.09%. We ended the quarter with book value per share of $18.90 per share, which reflected the impact of two dividends declared during the first quarter. Our final quarterly dividend of $0.41 per share declared on March -- February 13th, and our first monthly dividend of $0.14 per share declared on March 11th. Finally, as disclosed last night, book value per share as of April 30th was also $18.90, and that’s after deducting the $0.14 per share dividend declared on April 5th. Finally, I want to mention that Ellington Financial will be presenting at a few upcoming industry conferences, we look forward to seeing many of you at those. Now, over to Mark.

Thanks, JR. Q1 was a strong quarter for EFC with broad-based contributions from many of our strategies driving our nearly 12% annualized return. Now, as a REIT, we know there was focus on our core earnings and our core was very strong outpacing our dividend. Our agency strategy, which was an underperformer in Q4, came roaring back and earned back more than its Q4 drawdown. Our residential loan strategies, both non-QM and RPLs had strong quarters. The retained tranches from Ellington-sponsored CLOs contributed strong performance after challenging Q4. As you can see on slide 17, once again, our credit hedging portfolio was smaller this quarter, so the big jump in price in high-yield indices in Q1 was a very manageable headwind. This is a big change from our portfolio construction from years past, where we were heavily CUSIP-focused, which necessitated bigger credit hedges to manage the book value volatility. In the agency strategy, our focus on prepayment protected specified pools drove returns this quarter. With the drop in interest rates, the agency MBS markets became very-focused on prepayments and specified pools vastly outperformed TBAs with the significant expansion in payouts. Also, with new leadership at the FHFA. There is a distinct possibility that Fannie or Freddie will shrink their footprint in the mortgage market, which could reduce the supply of agency MBS and lead to spread tightening throughout the sector. Despite our strong performance this quarter, agency MBS actually lagged corporate high-yield and IG spreads by a wide margin. So, we view current spreads in the agency MBS market as attractive on both an absolute and a relative basis versus corporate. As both Larry and JR mentioned, we grew our agency portfolio by 17% this quarter, the leverage returns look good and these investments generate a lot of qualifying REIT income. Another highlight this month was that our team in London had a great outcome on the seasoned pre-crisis European mortgage deal, where we own the call rates. We exercised the call, resecuritized the loans, booked the profit and now on what we believe will be a high yielding residual. The combination of deep credit expertise and securitization knowledge in the front office team in London allowed us to pounce on this opportunity when we saw it last year. On the subject of call options, looking out a few years, the call options that we hold in the non-QM deals are another great byproduct of that business. When we do a non-QM securitization, we retain the right to call the deal down the road and effectively repurchase the underlying loans at par. In the future, that could lead to some very interesting opportunities. Valuations on our retained our tranches from Ellington-sponsored CLOs recovered from the depressed year-end valuations. At the same time, these investments continue to have tremendous positive carry. In CMBS and bridge loans, we continue to be very active. We grew those portfolios and have strong returns. We mentioned last quarter that we liked many segments of the commercial real estate debt space that we plan to deploy capital there. And I was pleased with our progress executing on that plan this quarter. Our residential NPL, RPL strategy was also a significant contributor this quarter, driven by ongoing resolutions and a large loan sale that's in contract. In non-QM, our volumes continue to march higher and credit performance remains strong. We are targeting a third non-QM securitization for later this quarter. We worked together with our partner to build this business slowly from the ground up. It took time but now it is really bearing fruit. We also continued to build up our residential transition loan, a fix and flip business. We are taking the same approach, build slowly, pick your partners carefully, and watch the credit performance closely. A lot of people are debating whether or not we are late in the credit cycle. We don't know. When we look at data across asset classes, we see a very healthy U.S. consumer with strong balance sheets, but we also see areas of concern. Credit spreads have tightened a lot in the past five years but they are still much wider than where they were precrisis. When a sector or an investment appreciates in price to the point which risk reward ratio no longer looks favorable, we sell it and reinvest in assets that we believe will provide better risk adjusted returns going forward. That's why we harvested some gains this quarter in residential RPLs, portfolio rotation, selling lower yields and buying higher yields are things that we will always keep doing. Ellington Financial is designed to be able to take advantage of market opportunities in many sectors. Expect our capital allocations to continue to be dynamic across various strategies. Our capital base is small relative to the size of the securitized product sectors in which we invest, so we can focus our capital on where we see the very best opportunities. Looking forward, we are excited about the investment opportunities we are seeing. Changes in FHA could be great for both our agency strategy and for our non-QM strategy. You are again seeing attractive bonds in CMBS, and the lower rate regime is great for housing affordability. The evolution of the portfolio from PTP to REIT has gone very smoothly. And I'm glad that 2019 is off to a strong start. Now, back to Larry.

Thanks, Mark. The year is off to a great start, and I am very happy with our first quarter results. While the tide was rising in the first quarter and most everyone made money, I think it's important to highlight that we’ve had strong and steady performance over the past several quarters in a diversity of market environments, including periods of volatility and of instability, rising and falling interest rates, and widening and tightening yield spreads. Consistent performance is the true differentiator for Ellington Financial. And we aim to deliver that consistent performance through the rigorous asset selection and steady investment pipeline that have resulted in our diversified and high-yielding portfolio, and through our commitment to protecting book value, including through the use of our dynamic and disciplined hedging strategies. We consistently evaluate how assets will perform in good and bad markets before we invest. And that discipline in asset selection has really paid off. As we’ve said before, we won't necessarily be the highest flying mortgage rate in bull markets, like the one we had in the first quarter but we believe that our approach has generated and will continue to generate better risk-adjusted returns for our shareholders over market cycles. Similarly, while our dividend yield of around 9% isn't the highest in the mortgage REIT space, it's set at a level where we believe that we can deliver our dividend without book value erosion. Finally, once again, I would like to thank our entire finance, tax and legal teams for all of the hard work in achieving the REIT conversion, as planned and on time. There was a tremendous amount of time and effort that took place behind the scenes with the significant changes to our subsidiary structure, lots of portfolio and income analysis to project compliance with the REIT test and help point the path to compliance, all the myriad changes associated with our shift away from investment company accounting and lots more. And as you can see from our results this quarter, we achieved this milestone as we had projected in a way that didn't impact our net income or core earnings. Okay operator, let's open the floor to questions.

Thank you. [Operator Instructions] Your first question comes on the line of Crispin Love of Sandler O'Neill.

Hi, guys. Thanks for taking my questions. So, one on looking at the increase of the agency portfolio in the quarter. Are you looking at some of the assets that you added there as kind of a placeholder and kind of over time, some if not all, kind of the addition that you had during the quarter, you'd be kind of putting into the credit portfolio at higher yields, if the opportunities present themselves?

Yes. I would say that I wouldn't call it a placeholder, because you usually think of a placeholder as something that is poised for us to sell pending something else coming in. I mean, we do -- having recently obviously just done this conversion, we still find this portfolio extremely helpful for the REIT test, and I think that's going to be the case for a little while yet. But you are right in that once the other REIT compliant, REIT qualifying assets, I should say, come in, then that will put less pressure, let's just say, on the necessary size of the portfolio. And I think over time, you may see that trend. But, I don't want to indicate that's something that is imminent.

And then, I see on slide 13, your interest rate sensitivity analysis where kind of the effect of REIT and how it affects the market value. Do you have any, I guess comments on that same analysis, but how it would affect net interest income kind of looking at if you -- if LIBOR were to go up or go down by about 50 basis points?

We don't have that handy. And…

Just directionally?

Yes. I mean, I think that it's really -- I would say -- so first of all, I don't have that not only handy but we haven't done those projections. But, given that -- I mean it always kind of in your assumptions, right? So, if things decline in parallel, right, then, our financing rates should go down with the yields on a portfolio. I mean, these are very-idealized assumptions. And so, I would not expect at that point any -- very significant change other than now you have a lower rate environment. So, you've got two components to your leverage net interest income, you've got your -- the income on the part that isn't leveraged, sort of the capital that you've deployed, and then you've got the leverage spread on what is leveraged. And the leverage spread, that shouldn't change in these idealized assumptions. But, the unleveraged yield that you're earning should, in theory, go down. So, you'd expect your overall, I'll just call it, net interest income as a percentage of capital, you would expect that to go down by that parallel shift downward. Let's just say, we're up by the parallel shift upward. But, there are so many other assumptions that are important and that I wouldn't hang my hat on that. We've seen in a lot of markets, for example, a lot of inelasticity actually. So, for example, in the non-QM market, we've seen that as rates have gone down. There hasn't been a lot of downward pressure on the yields on our portfolio there. But, if rates go up, we've also seen that we haven't seen upward pressure. So, there's just a lot of assumptions going on. But, in theory, it should pretty much just go up and down by the move itself and not the leveraged move.

Okay. And then, were there any share repurchase in the quarter. I don't think I saw any disclosure in the press release or the presentation?

Yes, early on in the quarter, about 50,000 shares. The majority of those actually traded at the end of December and settled the first few days of the quarter, when our price to book was much lower.

Your next question is from Doug Harter of Credit Suisse.

Thanks. Could you just talk about how you see incremental returns today and how that compares to say three months ago?

So, we had a strong quarter, but I don't really see a big difference between where we're putting money to work now and where we put it to work end of December. Like maybe the agency MBS market, those spreads are a little tighter, but it has a big benefit now that you are not near sort of an edge in rates that we haven't seen for a while. So, the agency market tends to get challenged when you get to either new lows in rates you haven't seen for a while or new highs in rates, and then, people ultimately are concerned about either extension risk or more prepayment risk. So, we've seen 240, 250 yields before. And on the credit side, a lot of what we have is floor arrangements. So, Larry mentioned non-QM. There, the note rate we're purchasing hasn't changed materially, despite a big drop in swap yields. So, their deal execution has actually improved fairly substantially. Bridge loan side, we're not really seeing changes in the rates at which we're able to put out money. So…

Consumer loans is -- again, that's just floor agreements that aren't really affected, the coupons that we see aren't really affected by these flips.

Yes. So, I mean, I guess on the agency side, the cost of prepaid protection is up. But there's still other things we’re finding to buy that we think are very interesting that haven't appreciated as much. So, I don't see a big difference in sort of what I think is levered ROE and where we're deploying capital now versus end of December.

Yes. If we were more focused on securities, I think that might not necessarily be the case. But given the loan markets that our focus is in, it's really -- we're not seeing it.

I guess, just on that point, can you talk about how much or how the yields on those loans change relative to security markets, and what the kind of the volatility of those available yields are to you?

Yes. So, for non-QM, for better, for worse, the yields where we buy loans and the rates offered to consumers have been only very loosely correlated to deal execution with securitizations market. So, that's a big benefit to us this year. It was a bit of a headwind in 2018, when rates were going up a lot. So, yes, I mean, I think as the non-QM market matures, you are going to see the pricing available to consumers to be more correlated to deal execution. But, it's still a young market. So, that link, that securitization link hasn't really been transferred back into changes in origination rates.

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

Hey, guys. Thanks. And congrats on a really solid start to the year. It's been really exciting to watch. Just a housekeeping item, what's the share of for EFC in the CLO segment of the portfolio, relative to the overall Ellington fund?

It varies from deal to deal. Yes. So, it varies from deal to deal. But, I would say, it's typically in the 9% to 20% range. I mean, I know that's a wide range but it sort of depends on what else we have going on here.

Okay. In deal number four, what was the percentage?

Yes. We know the deal number five is anticipated at just under 10%, there's actually a -- there’s a slight advantage to -- slight, to keeping it under 10% for a simplicity of accounting perspective and tax accounting, tax benefit as well. Four was probably in the 20s.

Okay. My second question is just on the capital structure of the company. I mean, I guess where Ellington trades right now would maybe prevent you from raising common equity. But, how do you feel about raising other types of equity or even debt to support what I would consider a fairly bullish outlook that you guys gave in your opening comments?

Yes. So, I think that we -- you are right about in terms of where our stock is now. So, we need to see improvement there to be raising common equity. In terms of what else we looked at, we looked at the convertible bond market. But, I think if you look at where we raise money on an unsecured basis, the opportunities for us to issue convertible bonds actually don't compare favorably to those. So, again, we're sort of more -- we're back to the keep it simple, straight debt as a possible -- that could be a possibility. We’ve got great execution on our deal back in 2017. So, that could be a way to add more investment power, if you will. And then, in terms of preferred, we've never done a preferred deal. It is an option now that we are a corporation as opposed to a publicly traded partnership. But, again, I think that the market kind of throws all the credits into the same bucket. We think for worse for us. So, I think, we would have to look very carefully at where we could do a straight debt deal again in comparison. But, that's at least something that is -- could at least be considered, whereas before it just wasn't something that as a PTP we could get decent execution on, at all. But, I think our focus certainly would be -- as of right now, would be on raising capital the simple ways, which is either through an unsecured debt deal, common deal, should our stock price behave and/or just obviously behind the scenes through just increasing our repo lines when appropriate, things like that.

Your next question comes from the line of Tim Hayes of B. Riley FBR.

Hey. Good afternoon, everyone. Thank you for taking my questions. My first one, Larry, you just mentioned you feel confident that you'll be able to grow the portfolio and earnings, which could potentially lead to an increase in the dividend; core earnings is well ahead of the dividend this quarter. Just wondering what you would need to see to more strongly consider a dividend increase, whether it's higher earnings or just a few quarters of stable outperformance? And then, just kind of a follow-up to that is, what is your target payout ratio? Should we expect the dividend to match core earnings over time or trend kind of closer to this 90% to 95% range?

Well, yes, so this is -- yes, we just had our first quarter as a REIT. And as you know, as PTP, we had infinite flexibility practically on our dividend, and as a REIT we don’t. We have to -- we're going to have to closely monitor our taxable income. And we think that taxable income is going to bear decent relationship to our core. So, there's always going to be that constraint, if you will, where it's possible that we might be forced to raise our dividend, depending on where taxable income is coming in. But, it's going to be based -- first of all, as you know, these are up to the full Board, and I'm just one person on the Board. But it's going to be based on what we've seen and what we project. And I think that if you look at the words that I used in the scripted part of the presentation, my personal opinion is that we wouldn't necessarily -- before with Ellington Financial as a publicly-traded partnership, we were more focused on, let's set it at a level and keep it there for maybe three quarters, four quarters, five quarters, eight quarters. But now that we sort of have this core metric and the tax constraint, I think we have to be a little more open to more frequent changes in the dividend. So, yes -- so, we'll monitor where it is and we’ll -- and so that's another way of saying that I don't think we necessarily need to see big shift in order to justify changes to dividend.

Understood, I appreciate those comments. And then, just curious, if -- or what the firm's internal view of interest rates are? The market is still pricing in a 50% chance of a cut this year. Just curious if that assumption is embedded in your strategy for the year or if you have adopted a different view? And then, reflecting what that view is, just how do you think about capital allocation in that context?

Yes. So, it's not really embedded in our view in that we hedge that, we believe we hedge that risk away. And that is going to affect the execution that we have on our hedges. But, we're not positioning a portfolio necessarily to benefit from that kind of a cut, or to be hurt by that kind of a cut or the lack of a cut. So, yes, so we try to be agnostic from a portfolio positioning standpoint. But that said, I think we do -- it does appear that the Fed is somewhat boxed in here. So, it does look like something really unexpected is going to have to happen in order to deviate from what you indicate as a pretty tight range of expectations, maybe they don't cut, maybe they cut once or twice. So, yes, so, we think that that is going to be -- I mean, that could be advantageous for us from a couple of perspectives. It could minimize the delta hedging costs on our agency portfolio as we saw during the first quarter. So, that's something that again we're not going to bank on it, but I think that it's reasonable to expect it. And I think that it also creates hopefully a nice window of stability just for these other low products that we have. I mean, those low products are pretty steady and pretty predictable, but if there was some major unexpected market situation, then that could ultimately affect even those. But, I guess, we feel even better about the predictability of that low as well.

Okay. That makes sense. And I appreciate those comments as well. And then, I guess just one more for me. The weighted average life on both the credit and agency portfolios dropped a good amount from the end of last quarter. And just wondering, if this was an intentional move to invest in some shorter duration securities and/or loans or just a coincidental function of portfolio rotation?

Yes. Well, -- right, yes, exactly. So, you'll see that if you go to page -- slide five. So, one of the longer assets is the non-dollar assets. And we were definitely selling some of those, and secondary CLOs, the row above it. So, those are some of the longest average lives, and that was just a function of the rotation to be able to comply with the REIT test. So that was, I guess you could say on purpose in terms of the rotation. But, it wasn't -- we like having a shorter duration here, but we are willing to go out longer when we think that it makes sense. But, that was a function in those two non-agency or credit categories a function of what just our selling and getting with our REIT conversion. In agencies, that's just a function of rates being lower. And so, now, projected average lives of agency securities are shorter because prepayments are expected to be higher. So, again, that was just a natural effect. Although, I would point out that our average lives probably held up better than a lot of others that were not as heavily invested in prepayment-protected pools.

Our final question comes from Mikhail Goberman of JMP Securities.

Good morning, gentlemen. Thanks for taking the question. Just I have one. Most of my questions have been answered. On the non-QM and specifically securitization, and forgive me, if, Mark, you mentioned this during the prepared remarks. Is there a dollar figure for the amount on the securitization that you have coming up?

Yes. I think it'll be probably somewhere between $200 million and $260 million.

2 to 260? And is there -- are you guys targeting a sort of -- in terms of securitization appetite, are you targeting an amount per quarter or is that something that is difficult to target?

Yes. I mean, what I would say there is that what Mark mentioned is kind of a typical nice-sized deal. So, honestly, we'd like to do them as frequently as we can. But, our production, in -- our non-QM production had historically been lower. When you get to the $40-million-plus mark, then it takes six months at $40 million to accumulate $240 million. So, at $40 million a month production, you're doing a deal every six months. We hope to get the $60 million where we'd be doing a deal every four months. But honestly, we wouldn't stop there either. I mean, we have a lot of appetite for this product. We think that the securitization arm is great. And to retain tranches that we hold and that we would expect to hold in the future as we do these, also look terrific. So, yes, the more frequently, the better.

Great. Thank you for the color, and congrats on a great quarter and getting all these achievements under your belt.

Thank you.

Thank you.

Thank you. This concludes the Ellington Financial first quarter 2019 earnings conference call. You may now disconnect.