Ellington Financial Inc. (EFC) Q2 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, thank you for standing by. And welcome to the Ellington Financial Second Quarter 2020 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode. 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, 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 13, 2020, and under Part 2 item 1A of our quarterly report on Form 10-Q as amended for the three months period ended March 31, 2020. 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, Co-Chief Investment Officer of EFC; and JR Herlihy, Chief Financial Officer of EFC. As described in our earnings press release, our second 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. Over the course of the second quarter, we saw a significant rebound across most credit sensitive fixed income assets, following that violent sell-off in March and early April. Thanks to our risk and liquidity management, EFC had avoided forced or distressed asset sales during the market turmoil, and so we avoided locking in losses at depressed prices. If you recall from our previous earnings call, we explained that when we had strategically sold Agency MBS in March and early April, we focused those sales on our most generic lower pay-ups specified pools, keeping our deep value pools with higher pay-ups in anticipation of an eventual market rebound. This selective selling in Agency MBS enabled us to get through the market crisis with our credit portfolio intact and our liquidity solid. After the worst had passed, we had first resumed only very limited purchase in sales and credit. But moving into May and June, markets had stabilized enough that we fully resumed new investments both in credit and agency. With many specialty finance companies still hobbled in the aftermath of the market-wide deleveraging events of March and early April, we are seeing compelling net interest margins on new loan originations and are exploring some exciting potential strategic investments in loan originators. As of today our agency portfolio is about back to where it was in March 31st. But more importantly our credit portfolio is already about 5% larger today than it was on June 30th, just a little over a month ago. To summarize all the steps we took during the depths of the market stresses have not only enabled us to participate in the market rebound in our existing credit assets, but since then we've been able to add and we continue to add credit assets at highly attractive prices. As you can see on slide 4, we had $0.85 per share of net income and $0.39 per share of core earnings. Since these both easily covered our $0.25 of dividends declared for the quarter, we rebuilt a nice amount of book value during the quarter and we are demonstrating that there's ample room for us to grow our dividend. Our economic return for the quarter was 5.7%, which is around 25% annualized. Importantly we had excellent performance from our loan businesses. In our non-QM business, we completed our fifth securitization in June with strong investor demand and our non-QM loan production has now come roaring back. Our short duration loan portfolios especially our residential transition loan and consumer loan portfolios generated great ROEs this quarter. As with previous quarters, our short duration loan portfolios have continued to return principal quickly. During the second quarter, we received proceeds from principal repayments of about $70 million on our small balance commercial mortgage loan, consumer loan and residential transition loan portfolios, which represented more than 11% of the aggregate size of those portfolios coming into the quarter. When the opportunity set for new investments is changing quickly like it has this year for our loan businesses, short duration can be a huge benefit as we can redeploy our incoming stream of principal payments exactly in those subsectors where we see the best opportunities. Additionally Longbridge Financial, the reverse mortgage originator, in which we hold a minority stake had one of its strongest quarters yet driven by strong borrower demand in the current environment and higher origination margins. Because the reverse mortgage business provides liquidity to borrowers without the need for them to make monthly principal and interest payments that business has a countercyclical component to it. And not surprisingly borrower demand for the product has soared in recent months amidst the economic pain and uncertainty brought on by COVID. Finally, we also had an exceptional quarter in our Agency RMBS portfolio, which Mark will discuss in more detail. On the liability side of the balance sheet, we took substantial steps during the second quarter to further improve and extend our sources of financing and leverage. The non-QM securitization deal, we completed add yet another term non mark-to-market facility to our balance sheet. We also extended the terms of several of our credit facilities and obtained term financing for numerous loan assets that were previously unfinanced. Furthermore, the market for standard repo financing of securities has now largely returned to pre March levels. We finished the second quarter with lower leverage and more cash even though we held at March 31. So we continue to maintain ample dry powder to capitalize on opportunities and to withstand any future shocks. With that, I'll turn the call over to JR to go through our second quarter financial results in more detail.

Thanks, Larry, and good morning everyone. Please turn to slide 6 for a summary of our income statement. For the quarter ended June 30, EFC reported net income of $0.85 per common share compared to a net loss of $3.04 per share for the first quarter. As Larry mentioned, prices in many credit-sensitive fixed income sectors rebounded in the second quarter generating significant net realized and unrealized gains on our credit assets, which reversed a portion of our losses from the first quarter. Core earnings for the second quarter was $0.39 per share compared to $0.46 per share in the first quarter, and exceeded the common stock dividends declared during the second quarter of $0.25 per share. The sequential decline in core earnings per share was primarily, due to lower average holdings period-over-period. Next please turn to slide 7, for the attribution of earnings between our credit and agency strategies. During the second quarter, the credit strategy generated a total gross profit of $0.76 per share, while the agency strategy generated a total gross profit of $0.33 per share. These compare to a gross loss of $2.47 per share in the credit strategy and a total gross loss of $0.38 per share in the agency strategy in the prior quarter. Most of our credit strategies performed well during the second quarter. We recorded large gains on non-QM loans non-Agency RMBS and CMBS all sectors that had experienced substantial distressed selling during the first quarter followed by a sharp rebound in prices and liquidity in the second quarter. Our loan strategies also performed well led by strong performance in the consumer loan and residential transition loan portfolios. In addition, our investments in loan originators generated solid returns during the quarter driven by an excellent quarter by Longbridge Financial. Conversely, our CLO holdings and euro-denominated RMBS portfolio generated net losses for the quarter and credit hedges were a drag to performance. Despite the partial market recovery in the second quarter prices for many of our credit investments remain below pre-COVID levels and we are still anticipating some principal losses in our credit portfolio. As has been widely reported, there has been a significant nationwide increase in loan delinquencies, forbearances, deferments and modifications and we are seeing effects of this on our own portfolios. Our agency strategy performed exceptionally well during the second quarter driven by significantly higher pay-ups on specified pools. In the first quarter, pay-ups had declined due to market-wide liquidity problems, as well as the implementation of the Federal Reserve's asset purchase program, which was focused on TBAs and generic pools as opposed to specified pools. In the second quarter, asset purchases by the Federal Reserve continued to be significant and the liquidity stresses of the previous quarter subsided. At the same time, mortgage rates declined and actual and projected prepayment rates rose significantly, which drove the expansion of pay-ups on our prepayment-protected specified pools. Average payouts on our specified pools increased to 3.3% as of June 30 from 1.47%, as of March 31. Also in our agency portfolio, our reverse mortgage portfolio performed well with much of the yield spread widening from March reversing during the second quarter. Turning next to slide 8, you can see that the size of our loan credit portfolio decreased approximately 14% to $1.26 billion at June 30. The decrease in the credit portfolio was mainly due to the completion of our non-QM securitization in June. Otherwise, sales and principal repayments roughly offset purchases and net realized and unrealized gains during the quarter. As Larry mentioned, we've continued making new credit investments into the third quarter and as of today the credit portfolio is back above $1.3 billion. On slide 9, you can see the agency portfolio. As Larry mentioned, we continued selling Agency RMBS into April as markets remain choppy, but moving into May and June market stabilized and we began building the agency portfolio back up again. Overall, the sales in April and principal repayments during the quarter exceeded the new purchases and the portfolio declined in size by 10% quarter-over-quarter to $913 million. As of today, the agency portfolio is back up to about $1 billion. Next please turn to slide 10 for a summary of our borrowings. Primarily, as a result of agency sales, our debt-to-equity ratio declined to 2.7:1 as of June 30, from 3.1:1 at March 31, adjusting for unsettled purchases and sales. Our recourse debt-to-equity ratio also adjusted for unsettled purchases and sales decreased over the same period to 1.5:1 from 2.1:1. The decline in our recourse debt-to-equity ratio was also driven by the completion of our non-QM securitization in June, which converted about $215 million of repo borrowings into non-recourse term financing. Our weighted average cost of funds continued to decrease and sympathy were short-term rates decreasing sequentially to 2.35% at June 30th from 2.58% at March 31st. At quarter end, we had cash and cash equivalents of approximately $147 million along with other unencumbered assets of approximately $312 million. For the second quarter, our total G&A expenses were $0.15 per share up slightly from $0.14 per share in the prior quarter. Other investment-related expenses increased quarter-over-quarter to $0.12 per share from $0.09, mainly because we incurred non-QM securitization issuance costs in Q2 but not in Q1. For the second quarter, we had accrued income tax expenses of $1.5 million as net taxable income in our domestic taxable REIT subsidiaries led to an increase in deferred tax liabilities. Finally, our book value per common share at June 30th was $15.67 up 4.1% from $15.06 at the end of the first quarter. Now, over to Mark.

Thanks JR. Q2 was a strong quarter for EFC with broad-based contributions from many strategies and strong core earnings. This was a quarter where our focus changed as the quarter progressed. Early in April markets were still volatile. Credit performance was uncertain and many investors were still being forced to sell assets. EFC was able to avoid having this sell to weakness helped by our high credit quality short duration portfolio and low leverage that we brought into the COVID crisis. Even in March and April, we were still getting substantial loan payoffs at par across our various loan strategies which is the best way to delever a portfolio. In early, May we were starting to see green shoots of recovery and we began to focus on growing our portfolio and being an opportunistic buyer of distressed securities and loans. One of the first sectors we added was seasoned non-agency RMBS. You can see the growth of that strategy on slide eight. The legacy non-agency market bore the brunt of relentless REIT and mutual funds selling in March and in April, which pushed prices to very distressed levels. Against the backdrop of aggressive Fed intervention, we are confident that housing would fare relatively well which would support non-agency fundamentals. So that sector made a lot of sense to us early in the quarter and indeed has subsequently repriced higher since. When the recovery started in earnest, we were a little surprised by how quickly the credit markets rebounded without really any material good news about either containment of the virus or about any economic turnaround. It seemed that within a matter of weeks the market went from too many sellers to too many buyers. The QE playbook was working as designed. The Fed was buying more than what was being produced in treasuries and agency MBS which was driving down yields; investors were selling these low-yielding safe assets to the Fed and receiving cash that pays them literally zero and so they were using that cash to buy riskier assets that still have some yield. While we were confident about the resiliency of housing during the pandemic, we believe that the impact of COVID on commercial real estate was going to be more significant and longer-lasting. Whereas the residential housing market is being helped by record low mortgage rates and generous forbearance programs, there are simply not the same amount of government programs that directly support commercial lending or offer relief to distressed commercial borrowers. That said, our CMBS and small balance commercial loan portfolios performed extremely well in the second quarter. Please turn to slide 12. You can see that we've expanded our small balance commercial loan disclosure in this quarter's earnings presentation. While our commercial mortgage portfolio will have some challenges, we are optimistic that these challenges will be limited. And meanwhile you can see that we are well-diversified among property types geography and all our loans are first liens. One huge positive development for the commercial real estate sector this quarter was the return of an active securitization market. After the global financial crisis of 2008 and 2009, it took years for the securitization markets to reopen. In this crisis, the securitization market reopened in a matter of weeks. And this is so significant because securitization allows capital to flow. That means that real estate can be financed, so it can be bought and sold, commercial bridge loans can get termed out into conduit CMBS loans, and property owners can take advantage of record low interest rates. And in fact, EFC has continued to have favorable resolutions on a small balance commercial loan portfolio. Moving to the residential market, aggressive Fed intervention lowered mortgage rates below 3% which is very supportive of home prices. In addition, the widespread availability of forbearance is keeping any possible distressed mortgage supply off the market and this should continue for a while. Given the economic uncertainty, you have seen a marginal tightening of the GSE credit box. And as a result we expect the non-QM sector to continue to fulfill an important role in the mortgage origination landscape for homebuyers that don't fit into what is now a narrower GSE box. Residential securitization markets also reopened this quarter, allowing EFC to price its fifth non-QM securitization. Because of the tremendous support from the Fed and the GSEs for the housing market we're very aggressive about restarting our non-QM lending programs and being an early mover is paying off for us now. Our non-QM volumes in June and July surprised us with their strength. And as with many origination businesses right now margins are healthy like Larry mentioned with respect to the reverse mortgage sector as well. While we do expect the non-QM origination market to become more competitive over time, right now, we are enjoying strong market share and benefiting from being one of the first platforms to start originating again after the market stress in March. The non-QM business looks very attractive to us right now, as rates on new originations are similar or higher than prior to COVID but both deal execution and financing rates have improved. While the Federal Reserve support helped our mortgage strategies, government stimulus through the CARES Act helped the performance of our consumer strategies. Between stimulus checks and enhanced unemployment benefits many consumers that have suffered a COVID-related loss of income have been able to remain current on their debt obligations. Of course we're closely monitoring the ongoing negotiations for a continuation of these benefits. We have seen strong collections across the board in our consumer loan portfolio. We have worked very closely with our partners on deferment strategies and the realized defaults that we are seeing have actually been quite modest. Another boost in that strategy is lower LIBOR rates. Our repo rates have dropped over 150 basis points this year directly adding to our net interest margin. Turning to the agency portfolio. We had very strong performance, returning to double-digit ROE for the quarter non-annualized. Early in the second quarter, we saw some signs that the market environment was a very good one for Agency MBS. First, after an absolutely wild March, interest rate volatility was very low in the second quarter. That was the first indication that the Fed intervention was succeeding. As mortgage rates dropped and origination volumes increased combined with Fed front month buying, it was clear to us that current coupon rolls are going to be very attractive. In anticipation, EFC did something it rarely does. It positioned itself as long current coupon 30-year MBS. Roll levels in the current coupon mortgage are so high right now and the hedging costs are so low that rolling TBA provides a powerful earnings stream. One month of roll income can be 20 basis points much more than the hedging cost for an entire year at current levels. Now back in March and April, EFC sold a portion of its agency portfolio after the Fed stabilized Agency MBS prices. We did that to increase our cash holdings, which was a much better alternative to selling credit-sensitive securities at distressed prices. As cash built up on our credit holdings with paydowns in consumer loans, residential transition loans and small balance commercial mortgage loans, we have largely replenished our Agency MBS holdings and have continued to add to those holdings into Q3 as Larry and JR mentioned. Looking ahead, I think EFC is in a strong position for the rest of the year. Our origination partners really demonstrated their value through the credit shock this year, weathering the crisis and posting strong loan performance. In addition, controlling the pricing of our asset pipeline, which was such an important part of our success last year as credit spreads tightened is becoming more and more important this year as massive Fed purchases are pushing investors out of government assets in a search for yield. Our ability to keep our asset acquisition yields high and are staying disciplined in credit quality given the economic uncertainty are going to be key ingredients for the second half of this year. Now back to Larry.

Thanks, Mark. I'm very pleased with Ellington Financial's performance, both for this past quarter and so far this year. We protected book value during extreme market stresses and then participated in the upside of the market recovery. Besides some strong strategy level performance, the key to our successful second quarter was the fact that we avoided for sales in the first quarter and could benefit from the rebound. All of this was thanks to our adherence to the liquidity management, risk management and hedging principles that have served us so well over the years. Please turn to Slide 13, which is our usual slide, where we show the stability of the EFC's returns over time, as well as those of the other hybrid mortgage REITs. I'm really proud of Ellington Financial's performance so far this year both on an absolute basis and relative to the other hybrid mortgage REITs. I was especially excited to restart new credit investments as quickly as we did, especially in our loan businesses. We're seeing a great opportunity to grab larger market share in several of our lending programs, especially in non-QM. And to boot we're seeing much wider net interest margins in these programs than we saw pre COVID. In our residential transition loan business, while we're not seeing a resurgence of supply yet in that market and while we don't expect a resurgence right away, we're gearing up anyway. My personal belief is that in the medium term, the opportunities in that market will actually be much greater than they were pre COVID. Sadly, one of the negative effects of COVID will be an increase in foreclosures but one of the positive effects of COVID will be an increase in remote working and therefore the mobility of the workforce. Both of these after effects, foreclosures and mobility will contribute positively to housing turnover and some of the highest and best use of that housing stock, especially the older housing stock will be in the hands of fix-and-flip and fix-and-rent operators. At Ellington Financial, we plan to be ready to supply even more capital to these markets when the time comes. As you can see from our balance sheet, we have lots of room to add assets from any and all of our loan pipelines, which we think could drive significant core earnings expansion going forward. In the second quarter, the Board increased our monthly dividend to $0.09 per share. And as I mentioned before, there's ample room for future dividend growth as we move into the back half of the year. All that said, a fair degree of caution is warranted, as it's still too early to predict the length and severity of the economic downturn not to mention that there's always uncertainty associated with upcoming presidential elections. So with these risks in mind, we will continue to depend on our core risk management principles and disciplined investment approach to protect shareholder capital and drive returns. Before we open the floor to questions, I would like to thank the entire Ellington team for their hard work over the past few months despite difficult circumstances. And for all of those listening on the call today we hope that you and your families stay healthy and safe. And with that we'll now open the call to your questions. Operator, please go ahead.

[Operator Instructions] And your first question is from Crispin Love of Piper Sandler.

Hi. Thanks for taking my questions. So first the release mentioned the potential for new investments in mortgage originators. Would any of these potential investments be similar to your LendSure and Longbridge relationships? And are there any specific asset types that you are most interested in right now for originators? A – Larry Penn: Yes. I think, well yes, I think Longbridge right now is not an investment yet where we are kind of directly buying assets from them. But it's a business that we believe in. There are lots of potential areas of growth. And it does give us exposure to a unique asset class which is reverse mortgage MSRs. Now our investment in LendSure and some others where we are getting a pipeline, we are actually looking at making investments in other loan originators which would include getting access to their origination capabilities that would include RTL. In a couple of cases we're looking at non-QM as well to diversify our sources there. So yes, I would say that at least as of now we're looking at minority stakes as we've had before. And in originators that are originating product that is similar to product that we have now. We're also looking nothing that's late-stage or anything like that. But we're also looking at some completely different products as well that we think could over time gain traction.

Okay. And then looking at the slide 12 where you have the detail on the small balance commercial portfolio, how are those loans performing currently? And how has that trended over the last few months and especially among the hotel and retail segments? A – Larry Penn: Sure. JR do you want to handle that?

Sure. So the -- I think the first point to make is and we mentioned it in today's call as well as last quarter's call, repayments and paydowns on small balance commercial have been strong kind of going back even to March and April and kind of current through the current period. So we've been getting resolutions favorable resolutions and paydowns and that's helped of course delever there. In terms of forbearance and deferment activity. I think I mentioned that it's affected the portfolio broadly and it has affected small balance commercial specifically. We've had and we'll have statistics in the Q when we file it but we have granted some forbearance agreements in our small balance commercial. I would say overall performance has been strong helped by repayments, but also just as measured by 90-plus delinquency has not really changed all that much. Of course, the forbearance is an important point to kind of attach on to that comment. So yes, so again, we'll put out some specific statistics in the Q but I think the performance has been strong. And in I guess related to the property types that you asked about I think we've -- here you see hotels 16% and retail is 11%. So those are limited to a quarter of UPB. And we haven't been I guess specific where exactly the performance is shaken out among the different property types. But I think the diversification by property type and geography, you can see here. And of course, the fact that everything is first lien helps as well. A – Larry Penn: Yes. And I just want to say that I think knock wood, we feel that for example even in the hotel sector we feel that we're in good shape there and that we've got our properties underwritten with enough cushion first liens as you can see in the slide. They're all first liens. And even post COVID we feel really good about our -- the equity that's still in these properties even on a mark-to-market basis. So we feel good about these assets ultimately resolving favorably.

Okay. Great. Thanks. That’s all very helpful and congrats on the greater quarter, Larry. A – Larry Penn: Thank you.

Thanks, Crispin.

Thank you. And your next question is from Doug Harter of Credit Suisse.

Hi, guys. This is actually Josh Bolton on for Doug. Larry you mentioned in your prepared remarks and in the press release that you see upside to the dividend. Just curious any more context around that as you're looking at the "run rate earnings potential" of the portfolio as it sits today? Thanks.

Yean. I don't want to give any more guidance, in terms of timing. But my -- as I said my personal view is that, there is upside there. The -- obviously that's a Board decision. For now, we like rebuilding book value. And I think we've mentioned on a prior call that, because of some tax selections that, we've made we actually don't have pressure on our -- so much on our dividend. So it's not like we will have to, raise it from a tax perspective at least not in the very near-term. But I think that we'll continue to sort of monitor, when the right time might be. I think -- but for now -- so we like rebuilding the book value the stock price is depressed; clearly very depressed. And if you look at the book we just announced. And you look at where our stock is trading. So for now, it's still a decent yield. I think we disclosed it's around a 9% yield for investors, which is still a healthy yield. As we see that stock price recover hopefully I think that will put more pressure on us to kind of maintain that dividend yield. So that will be another factor as well.

Great. That makes sense. Then I guess, given the increased liquidity you guys have built-up in the first half of the year, how are you thinking about the pace of asset growth? Appreciate the detail about current asset levels, and how you've grown the book since June 30th. And then I guess, following up on what you just said, how are you thinking about asset growth versus share buyback, given where the stock trades versus book value? Thanks.

Yeah. So we mentioned in the last call that, we lowered our target for buybacks, before we had been -- before COVID. I think anything below 80, we were buying pretty aggressively. And we've clearly lowered that. And you can see that, in terms of our share count. But I think that, we are seeing great production in IQM now. I think we could be in-store for some record months there, in the near future. As I mentioned in my remarks, I think we're going to see resurgence of RTL product and maybe not in the very short-term. And on the commercial side, we're starting to see our origination, bridge loan origination capabilities there really come into play. As you can imagine, that's going to be a sector where we're going to be able to really pick and choose what geographies, what property types and what individual assets, we're going to want to lend against. And I think that business is going to grow a lot too. So we want to keep a lot of room for what we see as a pretty healthy pipeline, for the remainder of the year, in credit assets and especially loan -- in our loan businesses. So I don't -- unless our stock really drops a lot back to -- well certainly, I think I mentioned in the last call, above 75% price-to-book. We're probably not buyers, now either even though we were in the past. So hopefully that gives you some color there.

Great. Thanks, Larry.

Thank you. Your next question is from Trevor Cranston of JMP Securities.

Hi. Thanks. A question on the incremental deployment into new credit assets, I think Mark mentioned that earlier in the quarter, you found some pretty compelling opportunities on the security side. I was curious, if you guys are seeing any areas in the securities market where prices sort of lagged and there are still distressed opportunities or if, the incremental deployment is really primarily just going to be focused on the whole loan opportunities? Thanks.

Mark?

Hi. Trevor.

Hi.

So I would say, when I think back about March and April what created the opportunity in securities was the fact that COVID from a financial perspective, it quickly morphed into a balance sheet crisis, right? And you had mutual funds and some levered investors that were forced to sell assets, in a short period of time. And typically the turnaround time for selling loans is much longer than it is for selling securities. So the price drop in securities, we thought was exaggerated relative to the risks. We saw that in March and April. And hence, we bought some non-agencies early on. We were constructive on housing. And that worked out very well, because we wanted to get EFC more invested. We want to take advantage of the opportunity. We've built up cash. And we knew starting our loan origination partnerships was going to take a little time. So we were aggressive on the security side. That worked out as well. It was in residential as well as also selectively in CMBS. Now you've seen a pretty strong recovery in legacy non-agency securities to the point where we don't necessarily view them as more attractive versus some of our loan strategies. There have been some other sectors of the securities market that aren't as big where we found some opportunities, so single-family rental is one. But I would say that I mentioned about QE sort of working as designed. And it has. It has sort of pushed a lot of investors out of government-guaranteed assets into non-government-guaranteed assets. And so that process has caused a broad-based recovery in securities prices. So I would say, selectively opportunistically we're still finding opportunities in securities. But it's not sort of on a beta basis the way it was earlier in the quarter.

I just wanted to add to that Mark that I think in -- on the commercial side in CMBS we're hopeful that there's going to be -- that there are good opportunities. There are going to be good opportunities, where as you may know from time to time, we've been a substantial B piece buyer in that market. As you can imagine a lot of the B piece buyers are that were traditional B piece buyers have been hobbled by COVID and are now not in the mix in terms of new purchases. So I think we've got less competition there. And there's going to be some distress obviously especially in certain deals versus others. So I think that's one market where we've had really great performance in the past. It's a long short strategy for us. We are not afraid to dial up and down our CMBX hedges in that product, put on relative value trades take off the hedge when it makes sense. And so that's a market where I think from a security standpoint we're certainly hopeful that we'll be able to add a lot for the remainder of the year at great levels much better levels than pre-COVID we think.

Okay. Got it. That's very helpful. I was interested in the comment you guys made about securities repo being pretty much back to pre-March levels. I think that might be the first time we've heard anyone say that on the calls this quarter. Can you comment on if you guys are seeing availability of repo on all the same types of collateral you were previously interested in using it on or if you were really primarily referring to sort of haircuts in rates when you made the comment?

We're talking about...

The secondary -- just as a secondary follow-up. I was curious if you guys are utilizing any repo on the retained bonds from the June securitization?

So we -- so first of all that was limited -- that statement I think was qualified as related to securities. So yes. So I think on the security side of things I think we -- for your -- generally non -- let's just say non-distressed securities I think we are seeing rates comparable to what we saw pre-COVID. So yes, so now on the loan side things are not back to where they were. And -- but as we said we've made a lot of progress getting them closer back to where they were and we continue to. So I think that's going to take a little bit longer for some of the lenders to get -- be aggressive in that market, but we see it happening. But it's not there yet. It's not back to pre-COVID levels yet in terms of loan repo.

Yes I wanted to add a couple of things. One is, if you look at agency repo by any measure spread to LIBOR absolute levels that's better than what it was pre-COVID. And I think that's because there's just been a tremendous appetite among money market funds for agency collateral. So that repo is probably better than what it was pre-COVID. And I talked about the importance of a restart of securitization markets. And so one thing I didn't mention in the prepared comments, but one other benefit of the restart of securitization markets is that it gives lenders transparency on dollar proceeds of securitization. So by that I mean, when you were going through March and April and lenders were lending against non-QM loans, it wasn't clear to them what securitization proceeds these loans would generate. Well now you've seen several deals get done and securitizations have ranged from as high as 95, 96, I think down to as low as 90. So now for lenders it's a much -- they have -- that's an important metric they can use for thinking about how much they want to lend against assets. So the fact that there's been the securitization market restart and there hasn't been one or two deals right? It's been a lot of deals where pricing has been consistent. It's been orderly. That has we've seen improve the availability of non-QM lending both on sort of the terms you get in terms of advanced rates and the tenor of these facilities, but also the spread to LIBOR.

Okay. That's helpful. And then...

Hold on one second. JR did you want to…

Yes just the second part of that question about, I think you specifically asked had we financed the retained tranches of our last non-QM deal and the answer is, yes.

Okay. Great. And then a question on the agency portfolio. You guys made a point in one of the slides about the biggest risk being a drop in pay-ups. I was curious if you could talk about how you think about the risk of that in light of the potential for mortgage rates in the primary secondary spread to maybe continue compressing over the balance of the year in prepay speeds either remaining very fast or potentially even moving higher going forward?

Yes. So pay-ups are high now. They're high for good reason. They're high because actual prepayment speeds are high and projected prepayment speeds are very high. And not something we mentioned on this call, but on the earning call we talked about some of the technological workarounds to social distancing that the GSEs put in place, we think are going to become sort of codified in mortgage origination. So availability of online, notaries more and more properties getting refinanced or purchased without the necessity of an appraiser actually entering the home, and so all those things to steepen the S curve. So pay-ups are high now. They're high for good reason. We spend a lot of time focusing on and the higher coupons focusing on where do we get the best prepaid protection for the money right? So the best prepay protection is generally loan balance. But sometimes if you look at that pricing you might think well, here's another story where the prepay protection isn't as strong, but the price is a lot lower. So managing pay-up risk is -- that's an integral part of managing the levered agency mortgage portfolio, but that's been -- that statement's been a truism for a long, long time. So the market has, sort of, embraced this lower for longer. It's embraced the now famous J. Powell statement about, I'm not even thinking about raising rates. So what's built into pay-ups is the belief that you're going to be in this 3-ish percent mortgage rate regime for a foreseeable future and that's going to lead to relatively fast prepayments on mortgage rates -- mortgages that have an incentive given that rate for a long time. So it's something we always think about. I think that we have enough tools on the hedging side and on the research side to manage through that. But we certainly acknowledge that that when you have pay-ups that have run-up a lot then there's potential that they can come back down to -- I think the scenarios where they would come back down appreciably you'd need to see a move in interest rates that I think is not right now really priced into the forward curve. It can certainly happen. But the market right now is having relatively low probability to it.

And if I could just add to that. So I think there's two ways that pay-ups drop. I mean I'm obviously oversimplifying. So one of them is when you've got a liquidity crisis and people are just paying up for the liquid TBAs and not paying up for the value in specified pools right? So that's one way that payoffs can drop. But the other way that they can drop as you said is just by across the board increases in prepayments right? So -- and if that happens. So for example, you mentioned the primary secondary mortgage rate spread narrowing. You'll see that affect not only specified pools right, but you'll also see it affect TBAs. And sort of, the reason I'm mentioning that is that right now going -- if you look at our presentation and I guess it's on slide 19, right you can see that as of June 30 we had a pretty modest TBA short measured by 10-year equivalents in terms of our hedging portfolio. On the next slide on slide 20 you can see that we had measured a little differently. We had a larger TBA short portfolio. But if you go back to where we were at the end of the year. So for example, you can go on our website and you can look at our presentation our fourth quarter presentation and you can turn to slide 19 it looks like it is there. And you can see that we were -- our TBA percentage of our hedging portfolio as measured by 10-year equivalents was 44%. And if you look at our next short TBA position that it was over $1 billion. So we can dial up and down -- sort of to make a long story short, we can dial up and down that TBA short a lot. And so we can help control our prepayment risk by doing so. And again that will address -- it won't necessarily address the compression of pay-ups that's due to another liquidity crisis, but I think it will address a across-the-board increase in prepayments of the type that you also mentioned.

Yeah. Okay. Appreciate your comments. Thank you guys.

Thank you. Your next question is from Eric Hagen of KBW.

Hey. Hope you guys are doing well. Following up on your comments on the benefits of a short duration portfolio, how much do you expect the portfolio to pay down over the next couple of quarters? And can you get specific on how fit the spreads are that you're seeing in the loan strategies? And how much of your runoff you think might be redeployed into those new originations?

Those are some tough questions. It's hard to predict. JR, do you have the number -- I think it'd probably better if we just reiterate what the number was in the first quarter and the second quarter.

Sure. That'd be helpful too.

Yes. So we had $70 million of paydowns for the second quarter across consumer, residential transition loans and small balance commercial. And we said that was about 11% of where we started in the quarter. And the previous quarter, I believe that number was $55 million for the same set of strategies. I can look that up as we talk but…

Yes, so -- yes. So let's -- I think the order of magnitude then.

Yes, it was 185. It was 155.

Great. Yes. So I think that's a good range to think about there. In terms of exactly where we would deploy it, I think our most predictable pipeline right now is the -- is non-QM and consumer. But as I mentioned, I'm certainly hopeful that our commercial mortgage bridge loan business is picking up. And so we can see some increases there. It's really hard to know. It's very asset-specific. But certainly with no question, I think that we'll see an increase in non-QM from the second quarter where we're really able to start getting going in the latter part of that quarter.

Got it. And the spreads on non-QM right now versus where they were say pre...

Yes, the yields. Yes. I mean, they're better. The yields are really not materially different. Maybe a little lower than they were pre-COVID, but the financing is just much, much lower. And that's financing -- whether you measure it by repo or whether you measure it by the securitization execution.

Right. Yes, that actually kind of ties into my follow-up question which is what is the net loss that you're expecting on the non-QM portfolio? And what was the loss adjusted yield on the retained tranches and the securitization from June and the repo rate that you're funding those securities there?

Not even sure we have a year-to-date loss in non-QM.

So the expectation for losses the forward expectation?

Oh I see. In terms of our -- I say...

The aggregate loss in the collateral over the life of the asset. What is that number?

Right, right. Yes. Well that's -- when I said a quote of yield I'm thinking about that. Remember, the new production we are doing the best we can to -- we can be selective in terms of borrowers. And we're -- part of our underwriting now is kind of COVID underwriting if you will, making sure that the employment status is where we want it to be and et cetera. So I think we're certainly hopeful that in the new originations that there's not going to be any material -- I mean we -- maybe a few basis points a year of losses going forward. Now on the existing portfolio, you've got some forbearances. I don't know Mark, do you have a number that you're -- a range that you're comfortable quoting in terms of where you think the -- our pre-COVID non-QM portfolio is going to shake out in terms of per annualized loss rates?

Yes. I wouldn't want to do that off the top of my head. I would say one thing is you have to separate out the very unfortunate situation that some borrowers may have had a COVID-related loss of income that they won't fully get back, right? And then they might need to seek lower shelter costs. So it's that situation which is terrible. But given what home prices do and given the LTVs of our loans it doesn't necessarily translate into a loss for us. So there is nothing I would want to quote off the top of my head. Other than broadly speaking, if you look at what's been going on with forbearance, forbearance numbers have been coming down and borrowers, many borrowers that originally opted for forbearance, I think in anticipation of potentially a loss of income have been making payments on those plans.

Yes. And we've been very LTV focused right for the entire life of that program. So there have been other originators that captured larger volume and wider yield spreads, higher coupons on their product by going after higher LTV product. And that was just never our MO and it still isn't.

Right. right.

So yes. So I think that ultimately is going to be a big saving grace to the extent that we do see delinquency rates and default rates in that portfolio, which there inevitably will be some.

Right. I hate to be that analyst kind of pressing for numbers on a Friday after a long week of earnings, but the loss adjusted yield on the securitization from June if I kind of estimated that to be in the maybe 10% ZIP code and then you got maybe 70% advance rate with -- on a repo line at maybe around 4%. Would that be kind of the right ZIP code there?

JR, do you have that handy or off the top of your head?

Yes. I mean to the second point, I think repo spreads for non-QM home loans are in kind of the 200, low-200s range.

Okay.

Yes. We…

Are there or more depending on what line you're talking about.

Yes. Spreads have compressed even more, right? And securitization execution has gotten even better since we did that deal not surprisingly. And when we did that deal the execution was not as good as it was pre-COVID, but we were very happy, because as Mark mentioned securitization market bounced back even more quickly, I think than we had expected. So -- and we were happy to jump on that for lots of reasons. So, ultimately, our securitization in that transaction was not as good as it was on prior transactions, because of that fact. We had bought most of those loans pre-COVID and we were securitizing still with one of the first few securitizations really in that market. I can't remember if we were the third or something like that, but it was around there securitization done post-COVID. So, yes. So that execution was still though -- was still great at the time and we had -- those loans were trading. Those -- that traded in the marketplace were trading much, much lower than we were able to execute via the securitization. So it's a great deal for us to have gotten off. And the securitization is even tighter now market and the yields that we can get on new assets are hanging in there. So, I think -- yes.

Right.

Yes. So as you said not as -- maybe not the mid-teens that we had seen before in terms of the yield on our retained tranches, but certainly something that's respectable.

Yes. No, I mean, it looks like a fantastic return on equity. I just wanted to make sure I had the kind of the right numbers there. So, thank you guys. Enjoy your weekend.

You too. Thanks.

You too.

Thank you. Your next question is from Tim Hayes of B. Riley.

Hey, good afternoon guys. Hope you are doing well. Just one for me. You had a small balance commercial focused competitor today say that they expect asset values broadly to decline by 10%. And then they also kind of highlighted that they expect a lot more acquisition opportunities towards the end of the year as maybe some kind of bank capital ratio forbearance periods start to expire. So just wondering how you feel about those comments. If that's consistent with the view internally and if you're seeing any opportunities to execute on portfolio acquisitions today?

Yes. We're seeing -- right. I don't, I mean, as far as 10% I think it's going to be very obviously geographically and property type-specific. So I don't want to comment on some overall number. Certainly, New York office space and certain hotels and things like that will definitely be challenged, I would say, probably more than that. But yes, we haven't seen a flood yet, but similar to what we were talking about in the residential transition loan space, yes, there's no question in my mind that there's going to be a lot of supply. We -- before we really got big in the bridge loan business and commercial mortgages, a much bigger business for us was NPLs. And we bought those really from two sources banks and deals conduit deals from special servicers. So I think you're going to see both of that activity. And the workout groups in banks are usually overwhelmed when crises like these take place and they got to focus their energies on the bigger assets and that leaves us -- we're in that $20 million and under sweet spot. That's our sweet spot, right, for NPLs. And it's a great place to be. And I think there's going to be a lot of supply. And I agree that the banks are going to be under pressure to sell product at some point, right, too soon now for them to be seeing a lot of pressure, but I think we will see it. And then of course you've got the CMBS deals as well that are going to be selling at some point. So I agree that that's going to be a good market for us. And that's where our roots started was in the NPL space and we only kind of migrated into the bridge loan space when that became in our view a more fertile market.

Got it. Thanks for the color, Larry.

Sure.

You have no further questions at this time. We do thank you for joining today's Ellington Financial conference call. You may disconnect at this time and have a wonderful day.