Ellington Financial Inc. (EFC) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Ellington Financial Fourth Quarter 2019 Earnings Conference Call. Today's call is being recorded. [Operator Instructions]. It is now my pleasure to turn the call over to Jason Frank, Deputy General Counsel and Secretary. Sir, you may begin.

Thank you. Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements 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 am joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our Co-Chief Investment Officer; and JR Herlihy, Chief Financial Officer of EFC. 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 note that any references to figures in this presentation are qualified in their entirety by the end notes 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. The fourth quarter of 2019 was a busy and productive one for Ellington Financial. We had strong performance across-the-board from a diverse mortgage loan and consumer loan businesses. In our non-QM mortgage business, our loan origination flow continues to accelerate. And in November, we successfully completed our second securitization of the year and fourth overall. Our agency strategy also had an excellent quarter. And in particular, we benefited from the significant capital allocation that we had made there after that sector weakened back in August. In October, we raised capital through our inaugural preferred stock offering, which garnered an investment-grade credit rating, which is rare in the mortgage REIT space. The offering saw strong participation from both institutional and retail investors and priced at a dividend rate that was among the lowest in our sector. We believe that both the credit rating and the execution of this offering rightly reflected Ellington Financial's long track record of book value stability, disciplined and dynamic hedging, effective risk management and prudent leverage. In mid-November, having deployed most of the proceeds from the preferred equity offering, we completed a follow-on common equity offering at attractive levels. We sized both the preferred and common offerings such that we were able to invest the proceeds in about 6 or 7 weeks. Turning to our earnings presentation, on Slide 4. You can see double-digit growth in the fourth quarter in both our credit and agency portfolios. Of course, this growth was facilitated by the proceeds from our two equity offerings. Looking at capital invested, the majority of the deployment went to the credit portfolio, but in a very diversified manner. In particular, our non-QM loan, residential transition loan and consumer loan portfolios all saw robust growth during the quarter, reflecting continued strong flow from those pipelines. We also deployed capital tactically to various sectors of our securities portfolios such as CMBS, CLOs and agency MBS, where we took advantage of some compelling entry points. I was extremely pleased with the pace and quality of our capital deployment, which enabled us to avoid a material drag on core earnings per common share even during a quarter where we grew our equity base by almost 30%. Turning now to Slide 6. You can see that with the tactical deployment to agency MBS during the quarter, our capital allocation to the agency strategy was 22% as of year-end. This 22% allocation to agency was unchanged compared to the end of the third quarter, but still a bit higher than the 16% allocation that we had started with at the beginning of 2019. Part of the growth of the agency portfolio during 2019 was opportunistic and tactical in response to some attractive buying opportunities. However, as we've discussed on previous calls, a bias towards a larger agency MBS portfolio was also an anticipated byproduct of the REIT conversion, if not in the long term, at least in the short and medium term. In addition, we view our agency strategy as a source of liquidity, if we see compelling credit investment opportunities emerge as well as an additional diversified source of earnings. So I do expect that over the long term, our agency strategy will eventually comprise a smaller share of our overall capital allocation, especially as our loan portfolios continue to grow. With that, I'll turn the call over to JR to go through our fourth quarter financial results in more detail.

Thanks, Larry, and good morning, everyone. Please turn to Slide 7 for a summary of our income statement. For the quarter ended December 31, 2019, EFC reported net income of $11.1 million or $0.31 per share compared to $17.3 million or $0.53 per share for the third quarter. Total net interest income increased 20.6% sequentially to $24.1 million from $20 million. Core earnings for the fourth quarter was $15.8 million or $0.44 per share, which was a modest per share decrease from $0.47 per share or $15.4 million in the third quarter, but still covered the common stock dividends declared during the fourth quarter of $0.42 per share. Our economic return for the fourth quarter was 1.6% and for the full year 2019 9.3%, in both cases, excluding the dilutive impact from our capital raises. Please turn to Slide 8 for the attribution of earnings between our credit and agency strategies. In the fourth quarter, the credit strategy generated gross income of $9.9 million or $0.28 per share, while the agency strategy generated gross income of $11.2 million or $0.32 per share. These compared to gross income of $18.6 million or $0.55 per share in the credit strategy and $4.1 million or $0.12 per share in the agency strategy in the prior quarter. Strong net interest income was the primary driver of earnings in the credit portfolio during the fourth quarter. Net interest income increased to $23 million for the quarter driven by the larger investment portfolio. The credit portfolio also generated $3.3 million in earnings from investments in unconsolidated entities and net realized and unrealized gains on interest rate hedges of $1.7 million. We had strong performance in several of our loan-related strategies, including small balance commercial mortgage loans, residential transition mortgage loans, consumer loans and the non-QM mortgage business. The small balance commercial mortgage loan strategy benefited from several favorable resolutions during the quarter. We also had excellent results from CLO notes and non-Agency RMBS. The credit portfolio also generated net realized and unrealized losses on the long investment portfolio of $8.4 million and net realized and unrealized losses of $3.8 million on credit hedges and other activities. For most of 2019, including the fourth quarter, CLO equity underperformed high-yield corporate indexes, which led to net realized and unrealized losses on our long investment portfolio and credit hedges during the quarter. Also, while our U.K. nonconforming RMBS portfolio generated gains for the quarter, our euro-denominated RMBS portfolio generated losses. Other investment-related expenses increased to $5.9 million this quarter, up from $3.3 million in the third quarter, due primarily to issuance costs related to our non-QM securitization completed in November. As Larry noted earlier, we had excellent performance in the Agency strategy during the fourth quarter as actual and implied volatility was low and as Agency RMBS yield spreads tightened with moderating prepayments. The Agency strategy generated net interest income of $2.1 million as well as net realized and unrealized gains of $1.9 million. Additionally, the increase in medium- and long-term interest rates during the quarter generated net realized and unrealized gains on our interest rate hedges of $7.2 million. Turning next to Slide 9. You can see that the credit portfolio grew by about 19% during the quarter to $1.44 billion as of year-end from $1.22 billion at September 30. As you can see, we added to the consumer loan portfolio, and we opportunistically increased the size of our secondary CLO and CMBS portfolios. We also grew our non-QM and residential transition loan portfolios, although you can't see that graphically on Slide 9 because the shift of assets out of the portfolio in connection with the November non-QM securitization slightly more than offset new loan purchases during the quarter. Consistent with prior quarters, this chart presents the size of our portfolio after reversing out the consolidation of our non-QM securitization trusts. On Slide 10, you can see that the size of our long Agency portfolio increased approximately 24% sequentially to $1.94 billion. We continue to concentrate our long holdings and prepayment protected specified pools and hedge interest rates across the yield curve. Next, please turn to Slide 11 for a summary of our borrowings. At quarter end, we had a total debt-to-equity ratio of 3.8:1 and recourse debt-to-equity ratio of 2.6:1. These compare to 4:1 and 2.9:1, respectively, for the prior quarter. Although we added significant borrowings during the quarter related to the larger investment portfolios, our equity also increased significantly over the course of the quarter as a result of the two equity offerings. And on balance, our overall leverage declined slightly. The decline in our recourse debt-to-equity ratio was also driven by the closing of our non-QM securitization, which, of course, converted a significant amount of recourse repo borrowings into nonrecourse term securitized debt. Finally, our weighted average cost of funds declined meaningfully during the quarter to 2.69% from 3.01% at September 30 as short-term LIBOR rate declines and as financing spreads versus LIBOR also tightened in several sectors and seem to be tightening further in 2020. For the fourth quarter, our total G&A expenses were $5.8 million, up from $4.5 million in the prior quarter driven partly by higher professional fees, but otherwise in line with the expectations given the larger capital base. Going forward, we project our G&A ratio -- expense ratio to decline significantly with larger capital base. Finally, for the fourth quarter, we had accrued income tax expenses of $1.2 million as net taxable income in our domestic taxable REIT subsidiaries led to an increase in deferred tax liabilities. At December 31, our book value per share was $18.48, which included the effects of $0.42 per share of dividends paid during the fourth quarter as well as the impact of our common and preferred stock offerings. Now over to Mark.

Thanks, JR. Q4 was a busy one for EFC as we deployed the proceeds from our common and preferred equity raises. In fact, over the course of 2019, our credit portfolio grew by 21% and the steady growth warranted a dividend increase, which we announced last month. We are very constructive on the return potential for our core credit strategies as low mortgage rates for both residential and commercial borrowers lend strong support to real estate cash flows and valuations. The combination of low mortgage rates and increasing wages is helping to keep housing affordable despite the modest increase in home prices we saw in 2019. On the commercial side, we are, with a few exceptions, seeing stable or rising rents, which combined with lower mortgage rates is leading to stable or even increasing debt service coverage ratios. In our Agency MBS portfolio, we generated a phenomenal annualized mid-20s ROE for the quarter and well over 15% ROE for the year based on allocated risk capital. We are not surprised by the sharp increase in prepayment rates this year and have positioned the portfolio accordingly to benefit. Turning to Slide 9. You can see that our credit portfolio grew roughly in proportion to the increase in our equity capital. JR described how our non-QM securitization explains the percentage drop for residential loans and REO in the pie chart. So don't be misled by this particular chart. Our non-QM business, which we largely conduct through our 49% owned subsidiary LendSure, continues to grow in leaps and bounds. December, which is normally a seasonally slow origination month in the residential mortgage business, was LendSure's biggest volume month ever with around $75 million -- $79 million of closed loans. That's well more than double LendSure's volume just a year earlier in December of 2018. LendSure is a very substantial company now with workforce of over 190 strong. Thanks, no small part, to the securitization deal, our new -- our non-QM mortgage business was a significant contributor to earnings this past year. As we grow our origination volumes in non-QM, we are reaping the benefits of better economies of scale. We issued two securitizations in 2019 as opposed to only 1 in 2018, and we are finding that more frequent issuers are generally awarded by the market with tighter debt spreads. Our deal sizes have also increased since our initial securitization through our benefiting from spreading the fixed deal expenses over larger deals. Our November deal was particularly successful because we had the added benefit of securitizing loans at a significant profit that we reacquired at par by exercising our call rights on our 2017 deal. Retaining the call rights on our non-QM securitizations is a great way for EFC to opportunistically control loans in the future and represent some additional upside potential for these securitizations for EFC. We are happy to be building a portfolio of these call options. Meanwhile, we're also seeing steady growth in our residential transition loans business, and we see a lot of runway there, especially given that the median age of U.S. homes is approaching 40 years. We really like the RTL loans we've been buying, and we are currently exploring establishing flow purchase agreements with additional RTL originators. Towards the end of 2019, there were some notable policy discussions about the future of the QM patch, which is the rule that has allowed the Fannie -- that has allowed Fannie and Freddie Mac to guarantee loans with higher debt-to-income ratios. The treasury, White House and FHFA have all been very vocal about the potential GSE reform. Mark Calabria, the head of FHFA, remains focused on what he sees is GSE Mission Creek with the QM patch being just 1 example. While we think that GSE reform may be slow and incremental and timing is hard to predict, we are confident about the direction that is heading under this administration. That direction is less GSE capital and more private capital supporting the mortgage market, which we believe will greatly benefit Ellington Financial. It's been a multiyear process to properly position EFC to take advantage of this potential public to private opportunity. Phase 1 of this transformation was to investigate whether there are high-quality loans that the GSEs do not guarantee that can be efficiently securitized and that can generate attractive retained tranches for the sponsors and originators to hold. The answer to that is a resounding yes. As evidenced, the non-QM sector is growing each year. Credit performance has been far better than rating agency projections resulting in numerous ratings upgrades and the economics for securitization sponsors has been very attractive. That's why you're seeing new entrants to the space and none of the first movers exiting. Now we are entering Phase 2. Phase 2 is our private capital competes directly with the GSEs, securitizing loans that are GSE eligible. We are seeing this starting with lower LTV investor loans. The GSEs supplied very high loan level price adjustments to these loans. And as a result, the execution in the private label market is typically better than GSE execution. Interestingly, the latest budget proposal from the Trump Administration included a proposal for even higher guarantee fees. As this proposal is enacted, it could make private capital even more attractive. We believe that private capital will be encouraged to take public market share in the area where there is enough private capital support growth. We believe that Ellington Financial's franchise is set up to benefit in such a public to private transition in both our capabilities to source and manage investments as well as our ownership of companies like LendSure that originate investments. Getting back to our fourth quarter results, our commercial real estate portfolio grew sequentially as we added CMBS. We are happy and excited to again be finding attractive B-piece investments, which have historically generated great returns for us. In our consumer loan portfolio, we saw continued robust growth and strong loan performance through our various proprietary loan agreements. But no quarter is without its challenges. In parts of the fourth quarter, we saw a big disconnect between leveraged loans and high-yield bonds and indices, which resulted in a loss for us, but it created an opportunity. We took advantage of the dislocation by picking up some cheap CLO investments, some of which is already monetized in 2020. The portfolio team at EFC brings deep resources and expertise not only to our credit-sensitive portfolios, but to our Agency MBS portfolio as well. This quarter, our Agency portfolio delivered outsized returns. And as you can see on Slide 8, we made money on both our Agency mortgage investments and our interest rate hedges. The adoption of technology has been radically changing the Agency mortgage market over the past few years as more and more originators are shedding their dependency on paper and fax machines and instead are moving to checking tax returns, bank statements and the like electronically. This is resulting in a much more streamlined origination or refinancing process for borrowers. Most of the transformational technologies are actually coming from Fannie and Freddie. The interest rate value last summer showed the extent to which these new technologies can impact prepayment speeds and many market participants were caught off guard, but EFC was well positioned for this as it, of course, led to a huge increase in the price of specified pools relative to PBA. On Slide 21, you can see that our Agency loan portfolio is primarily high-quality specified pools that provide a lot of call protection. And on Page 19, you can see that we had a lot of TBA shorts. We were effectively positioned this way for all of 2019. So the repricing of specified pools relative to TBA in response to prepayment surges helped to deliver sizable returns for us in 2019. Going forward, I like how the whole portfolio is current positioned, and I like where it's headed. Our proprietary origination channels continue to reward us with high-quality real estate and consumer investment. Now back to Larry.

Thanks, Mark. 2019 was a transformational year for Ellington Financial. Slide 5 lists some of the highlights. We successfully completed our REIT conversion, which not only gave our shareholders the more favorable tax treatment afforded to REIT dividends, but also triggered EFC's inclusion in several stock indexes. It improved our stock trading volume and the breadth and diversity of our investor base. All of this enabled us to grow our capital base by around 40% over the last 12 months through a series of equity offerings, both common and preferred, including our common equity offering last month. Our capital raises are significantly lowering our projected expense ratio. They've allowed us to expand our high-yielding loan pipelines. Over the course of 2019, net of pay downs, we originated and/or acquired $638 million of non-QM and residential transition loans, which was a 72% increase compared to 2018 as well as $212 million of small balance commercial mortgage loans, which was a 41% increase. Through it all, the total return for EFC stockholders was 32% in 2019. Our overall investment portfolio steadily grew, and core earnings consistently covered our dividend, which culminated in the 7% dividend raise that we announced last month. For 2020, we are focused on continuing to grow our proprietary loan pipelines, while at the same time, actively seeking to add new ones. We believe that our proprietary loan pipelines are critical in manufacturing and controlling our sources of return. With ample dry powder from our January common equity raise, along with lots of liquid Agency MBS assets on our balance sheet, we are in a strong position to play offense as we see increased volatility or even pullbacks in our various targeted asset classes. For example, in our Agency strategy, the 30-year mortgage rate is flirting with all-time lows, and the MBA refinancing index just hit a 6-plus year high. We could well be on the front edge of an even more extreme refinancing way for agency MBS compared to what we saw in 2019. If we were to see distressed prepayment driven selling in that market, including the Agency IO market where we're extremely light right now, we’d be in a great position to add on weakness. That said, and as always, we will continue to rely on our disciplined hedging and liquidity management to protect and preserve book value. With that, we'll now open the call to questions. Operator, please go ahead.

[Operator Instructions]. Your first question comes from the line of Doug Harter with Crédit Suisse.

I was just curious, obviously, you've been successful in deploying the capital you raised. How do you think about your appetite to raise further capital in 2020 and just when you think about constructing your balance sheet, the right mix of preferreds or high yield and common equity?

Thanks, Doug. It's Larry. Yes, so I think let's -- let me go backwards here. Starting with the right mix of preferred versus common, I think 20% is kind of a reasonable mix. Our preferred has actually traded up a lot. That gives us a little more room on the preferred side. So I think that's something that we would absolutely consider. And -- but I think, given that we have $115 million of preferred out there already, we're not -- we wouldn't be doubling that anytime soon. In terms of just capital raises, I mean, we think of those opportunistically, right? A couple of things -- 2 things really have to be in place, right? Number one, obviously, our -- the need for the investment capital needs to be there. And number two, our stock price needs to be at the right level, right? So we just deployed -- sorry, we just raised last month. It's just -- really just weeks ago. We've actually been -- at the same time that we've been buying and pleased with our buying pace, but we've also been selling as we have seen a bunch of sectors tightened this year so far. So the capital deployment from the last raise has been a little bit slower than it was in the prior 2 raises. And obviously, that's going to be a factor. Before we even think about another capital raise, I think we need to be in the right place, as I said, in both fronts, both the stock price front and seeing where the investment opportunities are and the need for the capital, yes. Our balance sheet has to, obviously, be ready for it as well.

Your next question comes from the line of Crispin Love with Piper Sandler.

So leverage was at just under 4x for the quarter. Can you remind us what your target debt-to-equity ratio is going forward? And then, I guess, just going a step forward or a step further, what your target leverage ratios would be for the Agency and credit portfolios on a stand-alone basis?

Okay. This is JR, Crispin. So I'd say that our -- well, first of all, we look at recourse leverage as probably the more important measure of overall leverage, included in the overall headline number, are all the nonrecourse, acute non-QM securitizations we've done that we consolidate for GAAP, but those are effectively term and non mark-to-market. So we really focus on that recourse measure, and I'm sure you saw that tick down from 2.9 to 2.6. That's a function of having more equity. I think that we don't have necessarily targets for that number because it depends on the asset mix between agency and credit, and Larry mentioned that our Agency at 22% is where it was at the end of September 30 as well, but it was higher than where it was, say, a year ago. Over time, we expect Agency to rotate into some of the loan portfolios as they generate products. So that will naturally bring down the leverage ratio because the leverage on Agency tends to be much higher than it is on credit. I would say, within the individual products, we have room on our lines and across-the-board, I would say. And an important part of this calculation is also risk capital. And so very rarely do we fully draw a given line. We save capital for any potential margin calls or shocks. So we, in general, keep a lot of capacity in lines. And I think our leverage is going to be a function of asset mix. But we were at 3x, maybe on the high side, recourse. Now we're 2.6. That's probably on the low end, but that's, I think, a good range to think about.

Okay. And then growth in the Agency and credit portfolios this quarter were both very strong. We saw a little faster Agency growth. And I know part of that is just removing the non-QM securitizations. But is the growth in Agency, was that a function of putting capital work to the -- from the recent raises? And would you expect to rotate some of that capital into credit strategies at higher ROEs in coming months or quarters?

Yes, absolutely. And I think, I -- in my remarks, I said basically that over the long term, we would absolutely imagine that we're going to replace some of that -- deploy what's currently deployed in agencies into the credit. I mean, the loan pipelines there are a little steadier, right? So you can't necessarily rush that any more than the pipelines that you have. But over time, that's absolutely where we see the portfolio going, and we're going to be dialing up or down the allocation to Agency and within the allocation to Agency, the amount of mortgage basis risk that we're taking as we see the opportunities. So that's the other factor as well. If we see a great entry point like we saw in the late summer of last year, then that might tick up again, right? But over the long term, I think you're absolutely right in terms of where we see the portfolio heading.

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

Can you guys just quantify the expense savings that you alluded to in your opening remarks about as you've raised capital and are bringing down the expense ratio?

Yes. So like, for example, in the raise that we did in January, so it was just $0.05 dilutive to the book value per share, but it was about $0.03. We projected $0.03 of savings per share and that's a perpetual savings, right, with a larger capital base based upon spreading that G&A over a larger capital base. So for us, given that we had already deployed the capital from the prior raise, this was a great ratio, right? This ratio of basically in 1.6 years we make back the dilution on the raise from G&A expense ratio savings. And just sort of long term, given the current capital raise, at our current size, we think we're in the high 2s, slightly below 3% in terms of G&A. And of course, that includes 150 basis point management fee.

High 2s. Got it. Great. And is there a concern that you guys might outgrow the capacity that LendSure can provide to you guys? I mean, you guys just gave some bullish remarks about private capital consuming a larger share of the mortgage market. I'm just curious how you could potentially maybe diversify or even grow your exposure to non-QM or other sources of private capital origination.

We're not exclusive to LendSure. So while LendSure is continuing to grow, we have actually already bought some packages from some other non-QM originators. LendSure is still the vast majority of what we're buying, but we are absolutely open. If we can team up with the right originators and these are companies that we know very well and that we need to make sure, of course, that their underwriting standards and processes are at the level that we need them to be. And with the couple of different non-QM originators that we bought in addition to LendSure, we're very confident there. So yes, we absolutely are not exclusive to LendSure.

Okay. And how about the levered return in non-QM now versus when you guys kind of started this program?

It's interesting. It's very -- it can be very rate dependent. As rates drop -- the rate at which we're originating loans tends to be a little sticky. But between the ROE when we're warehousing the loans and the arbitrage, if you will, of actually doing the securitizations, which we're now going to be doing more frequently, right, that's certainly the plan. It absolutely hits our ROE targets of getting into the double-digit -- comfortably into the double-digit ROE. So we're still very happy with what that business is projecting in terms of return on equity.

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

Just a follow-up on the non-QM discussion. You just mentioned that you expect the pace of securitizations to pick up. Just wondering if you're looking to get to a quarterly run rate? Or if there's any -- I don't want to call it target, but just maybe run rate in general you're looking to get to?

Yes. I mean, if -- look, if we can have, what do we say, $79 million for December, now that -- I'm not saying that that's what January and February are going to be. But if that's, hopefully, where LendSure's going to be, let's just say, by the second half of the year, averaging that or more, then at $80 million, let's call it, in 3 months, that's $240 million. That's a nice size deal. So we could be doing quarterly deals, probably not until maybe the latter part of the year or early next year. But certainly, our pace -- we anticipate that our pace is going to be more frequent than it was before. Maybe we could get to -- instead of 6 months, we get to 4 months right now because that seems to be where the origination volume is. LendSure has -- they've been hiring. As we mentioned on the call, over 190 in their workforce now. That compares to, I think, around a little over 100 a year earlier. So they have the capabilities. And given that we're also buying now from other parties and other originators, and that we also -- once in a while, we have our call options kick in from the deals that we do, right? We exercised that one earlier. And in November, simultaneous with our November deal on the stuff that was in the pipeline. So all of these things can help increase our frequency. So certainly, we'll be looking at as opposed to two a year, maybe last year; 3 a year, maybe this year; and hopefully, go to four a year pretty soon thereafter.

Got it. Okay. That's helpful. And are the credit characteristics pretty similar between the products you're getting from LendSure versus other originators?

Yes. This is Mark. Yes, they are fairly similar each. You'll find each originator has a little bit of a niche and has a little bit different borrower profile that they're most enthusiastic about. But yes, by and large, note rates are pretty similar. LTVs are similar. And that is in part due to our own preferences, and we've been -- we're very focused on loan-to-value ratio. We're not as focused on getting the highest note rate out there. So it's sort of a little bit of a dating process that we're sort of selecting people that think about credit the way we think about credit, and they sort of select us because we're the ones that see value in their origination process.

Okay. And then you made some comments earlier about prepayment activity in the refi index. Just curious how pay-ups on spec pools have been trending recently in light of that? And how you maybe see that trending and, I guess, in that broader context, just leverage returns there?

Yes. So Q4 was interesting because even though you had, I think, roughly a 25 basis point rate increase in the 10-year note, specified pool pay-ups were very resilient, right? They really didn't go down. What you've seen this year is -- you haven't seen a lot of volatility in them. So far into this year, you've reversed a large part of that interest rate increase in Q4. And you've seen pay-ups to respond a little bit to it. I mean, they've made a big move. So there are certain sectors of the specified pool market that we think offer a lot of value. There are other sectors that we would characterize as fully priced. And a lot of what we see is our responsibility as portfolio managers is to sort of make those distinctions. So they're not pounding the table cheap the way sort of we had the view they were of a year ago, but there's certainly still lots of pockets of relative value.

Okay. Got it. And then just one more for me. Core earnings of $0.44 per share covered the 4Q '19 dividends paid, but came in a little lower than the new quarterly run rate of $0.45 per share. Seeing as you announced the new dividend in January when you had a pretty good idea of where 4Q earnings were at that point, can you comment on just why you decided to raise the dividend and where you expect core earnings to land relative to the dividend in the first quarter, if you can? Or maybe if it's easier to just talk about that from a higher level in the context of capital deployment and investment activity so far in the quarter?

Yes. This is Larry. Thanks. Yes, as I think I mentioned, look, we're only literally a couple of few weeks -- 2 or 3 weeks in from the capital raise -- closing the capital raise, but deployment is going -- the net deployment is going a little bit slower than it did last time because, as I mentioned, we did see some attractive opportunities to actually sell some assets. Look, we're not just focused solely on core. We're also focused on book value appreciation and obviously, GAAP net income. We mark everything to market -- as you know, virtually everything to market through the income statement. So when we see -- we think that something is at the point where it's better from a total return standpoint to sell, and we're absolutely going to take that opportunity. And that's, I think, one of the things that we're known for. So the reason that we raised the dividend to $0.15 is really quite simple. We had been covering that and our projections were that we would actually exceed $0.15 slightly going forward. When we do raise capital, that's going to -- obviously, it's going to be a period of time, hopefully short that it's going to take to deploy that. And so I think, right, for maybe the quarter in which we raise capital, you'll see always possible to see a downtick in the core earnings. And you're absolutely right. The core earnings that you saw was less -- slightly less, right, $0.44 versus $0.45 is slightly less than $0.15 x3, but really very close. And on a normalized basis, after the capital raise as we saw it comfortably covering the $0.15 or the $0.45, if you will, for the quarter. So that's where we still are. We see core comfortably covering after deployment of the proceeds. And I don't think the proper way to size the dividend is to -- at least that's our philosophy not to size it based upon the fact that in the current quarter, you may have a slight drag on core based upon deploying a recent raise.

Your next question comes from the line of Trevor Cranston with JMP Securities.

You guys have talked a lot about the growth opportunity in the non-QM market, in particular, and rightfully so. But I was curious, as you guys look at the marketplace and are exploring relationships with originators, if there are any other new loan products that you guys see opportunities in and might continue or consider adding to the portfolio this year in addition to stuff you're currently sourcing?

Well, I'll say the answer is yes. There -- I don't want to necessarily get into too many specifics. I mean, we have talked about the RTL, the residential transition loan business, and the fact that we, are even as we speak, exploring opportunities to add new flow agreements -- flow purchase agreements there. In all of these markets, whether it's non-QM or whether it's RTL or could be other products as well, there's -- for example, one part of the non-QM market that we haven't really been terribly large in is making loans on rental -- residential rental properties, right, single-family rental properties. And so that's something that we're looking at potentially increasing more. But again, it always has to be the right partner. That's a relatively small percentage of LendSure's flow. Maybe it'll -- that will increase over time and maybe part of the growth, but we're always open, I think, to these -- exploring these strategic equity investments as well. I certainly wouldn't want to promise anything, but it's something that we're open to. And there are a lot of small originators out there where it can be a great partnership, where for a relatively small equity investment, we can help capture a lot of flow. And as we've seen with LendSure, you have potentially big opportunities for increases in the value of those strategic investments as well. So it's something that we're absolutely open to. And I think that if you look at what's going on in the marketplace and you can see what some of our peers have done, some of the hybrid REITs and mortgage REITs and some of the loan mortgage REITS, they have made, in some cases, some very large strategic investments. And I think that -- I actually think you're going to see more of that in the industry. It's -- it makes sense, right, for the originators to be teaming up with the asset managers who need and like the flow.

Yes. Got you. That makes sense. And the second question. Mark, you mentioned in your prepared comments the impact of changing technology is having in the mortgage space and on refinancing activity. I was just curious, as part of that, if we were to see some disruption in the market in terms of more efficient refinancing or just fast speeds at some point this year. If the MSR market is something that you guys have looked at and would consider adding as part of what EFC does?

Yes. So that's a good question. I mean, I would say that you've seen fast speeds, right, from July on of last year, and Larry mentioned a very high refi index print that came out last week. So you've seen fast prepayment speeds and you've seen some of the big major multi-lender pools pay significantly faster than how loans with a similar note rate paid in 2016. The mortgage rates actually bottomed out a little bit lower. In terms of MSRs, on the Fannie, Freddie side, you have to be a licensed servicer to hold those things. So we could look at things where we're in a partnership. You can get percentage of the cash flows. We've looked at that in the past, and I think we've gotten close. We've generally been of the view that the mortgage derivative market, IOs -- inverse IOs has been a little bit better for us. But yes, servicing -- and you've certainly seen some -- we need to get big in this space -- is an asset that can make a lot of sense because what you wind up doing is that you can replace a lot of your interest rate hedges with mortgage servicing rights. There's sort of a natural fit for a long agency specified pool portfolio impaired with servicing. So we've explored it. We're not ready to do anything right now, and I wouldn't say anything is imminent, but it's certainly a sector that we keep our eye on.

And if I could just add to that, we are going to compare when we look at forward mortgage MSRs, and I want to talk about reverse mortgage MSRs in a second. When we look at forward mortgage MSRs, those are, in some ways, can be very comparable to IOs, right? And we're always -- when we look at MSRs and we have been showing some MSR portfolios, we're a very big participant here at Ellington in the IO market and we're always comparing the relative value there to what we see in the IO market. And it's true -- I mean, so first of all, to finance an MSR -- the MSRs are higher-yielding than IOs. There's no question. But they're also more expensive to finance by quite a bit, and they're also illiquid. So all those things have to be taken into account. And we just haven't seen -- given where the leverage ROEs that we've seen on IOs, and we haven't been buying IOs. We talked about the fact that maybe if there is distressed selling, we'll start to look at IOs, again, a lot more closely and start buying more. But if you look at -- on a leveraged ROE, the pickup from MSRs hasn't been enough for us to compensate for the illiquidity and some of the other risks as well. I do want to mention though -- I don't want to give the impression that we don't own any MSRs because we indirectly own some through our investment in the reverse mortgage company, Longbridge. Longbridge is a relatively small investment of ours. It's under $30 million investment that we hold. But their primary asset -- tangible asset is an MSR portfolio. Now it's a reverse mortgage MSR portfolio, which is a very -- which is a unique asset class and has very different characteristics from the normal MSRs, but we do technically have. And we think that, that asset class can be -- priced right can be very attractive, but -- so we do indirectly have some exposure to MSRs.

Your next question comes from the line of Matthew Howlett with Nomura.

Congrats on completing the first year as a REIT. Just a couple of questions. First, I just wanted to touch on the non-QM real quickly. I mean, we look at your performance is excellent credit-wise, but you always hear about speeds and CPRs coming out fast. How much could that influence returns? Or do you guys just buy them right or find the right loans that are prepayment protected or at least come in speeds that you design?

So Matt, it's Mark. It's a good question, right? So we have a big research effort here. So when we started getting involved in non-QM market, we took all the available deals out there and we regress the model and that what's nice about non-QM now is the universe of securitized loans is growing, right? So you have more data points with which to build a model. And that research effort certainly gave us some insights about the prepayment characteristics of different types of non-QM loans. You mentioned some prepayment penalties. Those are primarily loans on investor properties, but there's also other prepayment differences we see as a function of loan attributes. Pricing these loans correctly to drive an ROE really means getting 2 things right: understanding the credit component and understanding the prepayment component. So we've worked hard on the prepayment component. And I would say that for the securitizations we've done, our projected speeds have come in pretty close to our actual speeds. So to date, the prepayment speeds you've seen on the non-QM market, at least the piece we retain have been broadly consistent with what our expectations are, but that can change. And I just tend to think that given our data focus and our research efforts that when those changes come, a lot of times that winds up sort of helping that. So you may -- even if you saw non-QM speeds increase, my hope is -- my expectation is, given our discipline, we're going to pick up on that early and react to it quickly and then find some opportunities as a result.

Got it. It makes a ton of sense. And certainly appreciate your expertise on prepayments. I know the firm has a long track record on it. Appreciate that. And moving towards -- and maybe just talk about the strategy in the corporate side. I mean, obviously, in the CLOs, you saw an opportunity. The high-yield market, what you have some derivatives on, it continues to rally. What's going on? Is this a big opportunity for you to sort of take advantage of the relative value difference and even the relative value difference between that and mortgages to corporate risk mortgages? Just talk a little bit about what do you think the opportunity is in your strategy in 2020?

Yes. Just on the corporate side, I mean, that's a little more tactical, right, in terms of our moves there. I don't want to sort of imply that we're going to morph the company. I mean, it is a REIT after all. So -- but we will continue to make tactical and opportunistic decisions around the corporate exposure that we have and the consumer loan portfolio as well. And sorry, did that answer your question? Or did you have...

Did you see a huge -- a big relative value difference in corporate risk mortgages today, just on a relative basis?

I think that in terms of investment-grade corporates and corporate bonds, yes, we do. But we're not -- that's not a big reason why we have our corporate hedges on. So we're not hedging significantly at all our mortgage portfolio with corporates and in the -- by the way, in the commercial mortgage market, in particular, there's a -- thankfully, a robust derivative market there in the CMBX market that we do use quite actively. So we have other tools at our disposal.

Yes. Matt, I would -- this is JR. I would just add one other thing that we also look at where Agency yield spreads are vis-à-vis those investment-grade and other corporate credit spreads. And even after Agency tightened in Q4, it still looks pretty attractive relative to corporates and relative to hedging instruments. So we'll look at the relative value for -- with respect to our Agency book at the same time.

Right. But not so much as to hedge with -- we're not going to be hedging our agencies with corporates. I mean, we're...

Right. I see.

Yes. So it's maybe more just to decide, hey, is this a good exit point or a good entry point, right, looking at that relative value and knowing that this is what the investment universe at large trying to get ahead of where they're going to move.

Got it. Great. And then just the last question on preferred deal, you guys had, I think, investment-grade rated preferred deal was priced 6.75%. I mean, I know today the market is tighter. You've said -- I think you said 20% you're up to preferred? And any sense on just sort of -- I mean, that's got to be massively accretive if you do something tighter than your last deal? And how do you look at that avenue going forward?

Yes. Like I said, look, I don't want to give any promises. I mean, 20% is just, I think, something that is fairly standard, if you ask people what they think a reasonable capital structure is. Yes, hey, our 6.75% coupon at the time was -- I think, it was considered incredible especially for our size. A lot of times, it correlates with market cap. Now if you look at where our preferred is trading, it's sub-6% in terms of yield to call. Yes, so it's absolutely something we would look at. Yes. So I think it's -- I think just looking very long term, I think it could be an important part of our capital structure, absolutely.

And certainly accretive to where your targeted yields are, right?

Yes. Very accretive, absolutely. Absolutely.

Your last question comes from the line of Lee Cooperman with Omega Family Office.

A question. I understand what you guys are doing. Assets under management times fee equal revenue. So you'd like to push out as much stock as you can. My concern is that as you put out more stock in this low interest rate environment that you're creating a burden on the company that may make it difficult to maintain the distribution. So I know you've talked around this in the last 50 minutes on the call, but are you comfortable that all this capital you're raising will not result ultimately in the dividend having to be reduced and that the dividend would be enhanced by a capital raising?

I am comfortable, absolutely, that in the product sets, we have a very diverse product set. Our loan pipelines are growing in leaps and balances, for example, in the non-QM, the RTL, the consumer space. I am absolutely comfortable that we can handle a larger capital base. Of course, we need to be opportunistic. I've said about when we raise capital, where our stock price is. I think every time we've raised capital in the past 12 months, it's been a better, better level. The last one was barely, barely dilutive. It's certainly our hope that the next one would be accretive. But -- you know what, we're not there. I just mentioned we just did a raise. We're deploying that. We'll see where we are after the deployment and see where our stock price is. We'll see where our pipelines are. If we're selling other parts of our portfolio down, then we won't need to do a raise. But I'm very comfortable answering your question in the affirmative.

Ladies and gentlemen, that concludes today's conference call. You may now disconnect.