Ellington Financial Inc (EFC) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial second-quarter 2015 financial results conference call. Today's call is being recorded. (Operator Instructions)

It is now my pleasure to turn the floor over to Lindsay Tragler, Investor Relations. You may begin.

Thanks, Maria. 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 provision of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not historical in nature and they are based on management's beliefs, assumptions, and expectations. As described under Item 1A of our annual report on Form 10-K filed March 13, 2015, forward-looking statements are subject to a variety of risks and uncertainties that could cause the Company's actual results to differ from its beliefs, expectations, estimates, and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events.

Statements made during this conference call are made as of the date of this call and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

I have with me on the call today Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our co-Chief Investment Officer; and Lisa Mumford, our Chief Financial Officer.

With that, I will now turn the call over to Larry.

Thanks, Lindsay. Once again, it is our pleasure to speak with our shareholders this morning as we release our second-quarter results. As always, we appreciate your time taking the time to participate on the call today.

First, some highlights. Ellington Financial had a good quarter, in light of the significant interest rate and credit spread volatility that impacted the market, as our disciplined hedging strategy served to insulate our book value.

We generated net income of $0.39 per share, which equates to a total economic return of 1.7% for the second quarter and brings our year-to-date total economic return to 4.3%. Both our Agency and non-Agency strategies made positive contributions to our net income during the second quarter.

Our non-Agency RMBS positions, which for the first time now comprise less than half of our non-Agency long portfolio, had a strong quarter, again supported by both the absence of new supply and improving housing market fundamentals. As prices in this sector held firm, despite spread widening in other credit-sensitive segments, we sold non-Agency RMBS into strength to redeploy the capital in other strategies where we are seeing not only investments that are attractive in their own right, but that also represent excellent prospects for growth. We are very excited about our pipeline of potential investments and many of these non-RMBS strategies, particularly as we started to see cracks in certain pockets of the market.

During the second quarter, we added European assets, distressed small balance commercial real estate loans, NPLs, and consumer loans. The strategies, joined by the common theme of filling voids where big banks have exited the marketplace, are starting to have a more meaningful impact on our financial results.

We will follow the same formula as we have on previous calls. First, Lisa will run through our financial results. Then, Mark will discuss how the MBS market performed over the course of the quarter, how we positioned our portfolio, and what our market outlook is. I will follow with some closing remarks before opening the floor to questions.

As a reminder, we have posted our second-quarter earnings conference call presentation right on the homepage of our website: www.ellingtonfinancial.com. Lisa and Mark's prepared remarks will track the presentation. If you have this presentation in front of you, please turn to page 4 to follow along.

I'm going to turn it over to Lisa now.

Thank you, Larry, and good morning, everyone. As you can see in our earnings attribution table on page 4 of the presentation, during the second quarter, we generated net income of $13.2 million or $0.39 per share. The major components of our net income for the quarter were our non-Agency strategy gross income of $16.5 million or $0.49 per share, Agency RMBS strategy growth income of $1.7 million or $0.05 per share, and expenses of $5 million or $0.15 per share.

Our net income declined by approximately $6 million compared to the first quarter. And while income from both non-Agency and Agency decreased quarter over quarter, most of the decline was related to our Agency portfolio. This portfolio was impacted by lower asset prices that resulted from the significant spread widening that occurred during the quarter.

However, this was partially offset by our interest rate hedges. Our non-Agency results were also negatively impacted by widening spreads, but to a lesser degree. Within our non-Agency portfolio, while our legacy RMBS still generates most of our income, the relative contribution of our other strategies is trending upward.

In the second quarter, inclusive of net realized and unrealized gains and losses and our core credit hedges and interest rate hedges, the contribution of our non-Agency RMBS was approximately $0.30 per share or 63% of our gross non-Agency income. A meaningful portion of that non-Agency RMBS income for the period was attributable to net realized gains, as we were net sellers of non-Agency RMBS during the quarter.

Over the second quarter, the size of our non-Agency RMBS portfolio declined by about $90 million and it is now almost $180 million smaller than it was at the beginning of the year. As we have been opportunistically selling some of our non-Agency RMBS portfolio, we have freed up capital to redeploy into our diversification strategies. And we are benefiting from increasing contributions from other areas, including consumer loans, residential NPLs, CLOs, European NBS and ABS, CMBS and small balance commercial loans, and our investments in mortgage-related entities.

Because our results include the impact of mark to market adjustments, the relative contributions from these subsectors can vary from quarter to quarter. That being said, they constitute an increasing portion of our income and we expect this trend to continue.

Net of our non-Agency RMBS-related income of $0.30 per share in the second quarter, the remainder of our non-Agency income amounted to approximately $0.19 per share. To provide a sense of the relative contributions, we earned approximately $0.09 per share from our loan portfolios, net of loan-related expenses, including consumer loans, residential NPLs, and small balance commercial loans.

CMBS and CLOs contributed $0.06 per share, European MBS and ABS contributed $0.04 per share, and our debt and equity investments in private mortgage-related corporate entities contributed approximately $0.02 per share.

During the second quarter, we were not immune to the spread rising that impacted the global fixed income market. And as a result, we had net unrealized losses from our distressed corporate debt holdings, which declined in value, and weaker results from our CLOs and CMBS.

Our second-quarter Agency RMBS returns were lower relative to the first quarter, but this strategy did generate positive results, despite significant spread widening, contributing gross income of $0.05 per share. Our Agency RMBS utilized about 17% of our capital in the second quarter, resulting in a gross return on allocated capital of close to 1.3% for the quarter. Our hedges, principally in the form of interest rate swaps and short TBAs, partially offset the impacts of declining asset prices in our Agency portfolio.

At the end of the quarter, our total loan non-Agency portfolio was approximately $753 million, down from approximately $790 million in the first quarter, while our Agency portfolio was relatively unchanged inside that $1.1 billion.

As we have sold some of our legacy non-Agency RMBS holdings, our leverage ratio has declined; however, as we put additional repo and financing lines in place in connection with some of our other non-Agency assets, we expect that over time, our leverage ratio will increase. Our expenses are essentially on forecast and our annualized expense for the quarter was 2.5%.

At the beginning of the quarter, our diluted book value per share was $23.01. And after taking into account our first-quarter dividend in the amount of $0.65, which was declared and paid in the second quarter, and our net income of $0.39 per share, we ended the quarter with diluted book value per share of $22.75, representing a decline of just 1.1%.

I'd now like to turn the presentation over to Mark.

Thanks, Lisa. During the second quarter, conditions in the credit market had a distinctly different feel than in the previous several quarters. In previous quarters, there was a quality of complacency around credit risk, especially corporate credit risk.

This quarter, we saw material spread widening in many sectors, a lot of spread volatility, and some bad news -- not just bad technicals -- in some corners of the credit market. Specifically, CMBS, US and European CLO, and distressed corporate debt markets were all weaker in the second quarter.

Some popular rep and warrant trades, which we have avoided in the non-Agency RMBS market, dropped in price significantly after some unfavorable court decisions. For EFC, this creates opportunities going forward, as our credit portfolio has performed well throughout the second quarter's dislocation. The credit hedges that we have in place help to protect our portfolio and we had very little exposure to the sectors that bore the brunt of the price decline.

In some segments of the market, we are able to take advantage of stronger credit conditions at the time to sell assets and raise cash, giving us dry powder for some opportunistic purchases in sectors that experience spread widening.

Our legacy non-Agency RMBS securities, which at this point are 10-year seasoned and have benefited from a stronger housing market in the last 2 years, held up very well relative to many other sectors of structured products. These assets offer cash flows that are stable and predictable, and seniority in the capital structure was limited interest rate risk. Those attributes gave rise to the consistent demand for non-Agency RMBS.

Turbulence creates opportunity and we are just now starting to reap the benefits of the powerful combination of high asset yields and very low financing costs in some of our new initiatives, like consumer loans. Significantly, in July, we put in place a repo agreement on some of our consumer loans, allowing us to lock in a very large spread between our expected asset yield and our financing costs.

It has been several years since we've seen this kind of spread between asset yields and financing costs. The yield spread between asset and financing costs allows modest use of leverage to potentially have a big impact on earnings.

When the spread between asset yield and financing costs is narrow, it takes many turns of leverage and therefore lots of credit risk to impact earnings materially. And we view using many turns of leverage to be too dangerous, unless the underlying assets are highly liquid. We have been in active discussions to secure similar financing arrangements for other high-yielding assets that we currently own for cash and I think that could be a further tailwind to earnings in the future.

Larry and Lisa both mentioned our diversification efforts. I would just comment that we view legacy non-Agency RMBS as a steady source of not only current income, but also alpha generation, as it remains a market where we have been able to manufacture trading gains in addition to market beta. We own seasoned legacy assets with relatively predictable borrower default and prepayment behavior, and housing prices have been on a steady march higher, with strong technicals.

We also use this portion of our portfolio as a source of liquidity, selling off pieces of it that have reached target prices when we see high-yielding investments in other sectors that we believe offer better risk-adjusted returns. This should allow us to take advantage of higher-yielding those less liquid assets when the trade-off is compelling, even at times when depressed book values in the sector preclude fresh capital raises.

If our entire portfolio had been invested in illiquid assets going into this cycle, we would save substantial headwinds in attempting any kind of portfolio retainment. As it stands now, we have already replaced much of our legacy RMBS holdings with higher-yielding alternatives, but we still have substantial holdings that can be converted into higher-yielding investments as those opportunities arise and if the total return potential looks compelling.

During the second quarter, we were able to increase our commercial real estate exposure. That's been one of the highest-returning asset classes -- that's been one of our highest-returning asset classes over the last few years, so we are eager to deploy capital here when we see opportunities that meet our return target. As many of the 2005 vintage 10-year interest-only commercial real estate loans hit their 10-year maturities, we expect to see more opportunities to acquire small balance commercial loans at attractive levels.

At Lisa noted in the Agency RMBS portfolio, we were able to make money in a very challenging environment. This last quarter was a time of very weak Agency mortgage performance, but our strategy of actively trading, reducing our net mortgage risk with TBAs, and controlling our interest rate risk with swaps along with the entire yield curve served us well. As the Fed has reduced its footprint, we have seen more relative value trading opportunities in the Agency space, which should help boost the returns going forward.

Getting through this quarter not only unscathed but profitable positions us well to take advantage of the wider Agency spreads and a steeper yield curve than what we faced at the beginning of the quarter. Going forward, the investment landscape looks very attractive. We are seeing more investments offering double-digit unlevered yields now than at any time in the last two years.

In addition, our ability to secure financing on these assets at low interest rates is much better now than it's been in any time -- at any other time post crisis. The pace of sales of potentially high-yielding assets in Europe has picked up, as have sales of distressed small balance commercial real estate loans. We have ample dry powder as well as liquid assets that we can convert into cash, so we should be well positioned to capitalize if dislocations occur during the third quarter as a result of a potential Fed rate hike. Pairing these assets with a modest amount of low-cost leverage could help borrowings and support the dividend.

With that, I will turn the call back to Larry.

Thanks, Mark. As Mark said, legacy RMBS significantly outperformed other sectors during the second quarter and we were again net sellers. As you can see on pages 11 and 12 of the presentation, we have incrementally and selectively rotated out of legacy RBS and into related sectors of the structured products universe, where going forward, we see dislocations in capital voids presenting higher and more consistent risk-adjusted returns.

We think that our strategies in these related sectors, such as our consumer loan strategy, just to name one. We'll continue to become more impactful, particularly as the yield pickup for these strategies over our RMBS strategies seems to be getting wider.

In many of these strategies, we tend to gravitate toward smaller or privately negotiated transactions, where we believe we often have a sourcing advantage, and/or where we believe our research and analytical expertise gives us an edge. Much of our competition won't even focus on private loan transactions under $50 million, but with our size and breadth of expertise, that's really our sweet spot.

For example, cracks have started show in Europe and this contributed to a significant increase in our deal flow in the region during the second quarter. Our London-based team added European CLOs, which grew to 7% of non-Agency long portfolio, up from 2% at the end of the first quarter.

They also acquired another Spanish nonperforming loan portfolio. This NPL package contains a mixture of both commercial and residential mortgage loans and some REO. We were able to purchase the portfolio at a very attractive discount to the underlying property values, as the Spanish bank that held this portfolio was a motivated seller. And as there were few natural buyers for this package, given the mixed composition of the collateral and the sub-$50 million portfolio size.

So far, 2015 is on pace to be the highest volume year on record in Spanish NPL sales. And we believe that our service relationships in the region and loan level modeling expertise position us with a competitive advantage as additional NPL pools hit the market.

In the mortgage origination space, our efforts have started to bear fruit, as during the second quarter, we entered into our second flow agreement with an originator in which we hold a strategic investment stake. And post-quarter end, we closed on our first non-QM loan acquisitions.

Our non-QM underwriting standards target segments of the mortgage market that we believe will offer strong credit performance, but aren't eligible for Agency or bank lending programs. While we expect our non-QM purchase flow to be slow initially, over the longer term, we are excited about the potential opportunities that we see in non-QM origination.

So we are positioning ourselves for what could end up being significant consumer demand for non-QM mortgages. Our objective here is to work carefully with selected partners to build out a business that will enable us to manufacture a steady pipeline of investments and thereby create significant franchise value.

Finally, I'd like to mention our stock price and our share repurchase program. Stock prices in the mortgage REIT sector are depressed and EFC stock price has fallen in sympathy with its peers. We think concerns about market volatility after a potential Fed rate hike are the main culprit and this may persist until the market sees how each company actually fares with each rate hike.

Given the steep discount to book value at which Ellington Financial is now trading, share repurchases are again back on our radar screen. The last time that we repurchased shares to take advantage of big discounts in the sector was in 2011, when EFC was trading at similar discounts to book.

In the past few weeks, our stock did reach levels where we would've repurchased shares, but we weren't able to execute any repurchases at that time because we were in a blackout period pending the release of our earnings. As a result, earlier this week, management recommended and our Board authorized the repurchase of up to 1.7 million shares or about 5% of our outstanding shares. This is a significant increase in our repurchase program, as we had less than 1% of outstanding shares remaining under the previous program.

We are realistic here. The mortgage REIT sector may remain depressed for some time and it may even become more depressed, depending especially on how the largest mortgage REITs fair through a Fed tightening cycle.

Given that reality, we will strive to be judicious about the pace and timing of potential repurchases. We take many factors into account when considering whether to repurchase stock: the immediately accretive effects on book value per share and earnings per share on the one hand; and the negative longer-term effects on expense ratios, stock liquidity, and the ability to pursue larger investment opportunities and pursue certain new business lines on the other hand.

When a company repurchases stock, there is no guarantee that it will be in a reasonable position to reissue that stock on any specific time frame. So in a way, a stock repurchase is akin to making an extremely long-term investment that's immediately accretive.

That said, while we are continuing to see excellent investment opportunities, we believe that at the right price, the repurchase of some of our shares can be an effective and appropriate use of our capital.

As I hope you can infer from our portfolio activity this past quarter, the investment opportunity set that we are seeing is broader than we've seen in a while. And Ellington has the breadth to capitalize on that opportunity set. Furthermore, for the first time since the financial crisis, it looks like the market will finally have to deal with a hike in rates by the Federal Reserve and we see this creating the potential for more significant cracks and liquidity gaps in the coming quarters.

Dislocations often present the best opportunities for us. Just look at page 23 of the presentation to see how by not losing money in 2008, we set ourselves up for a tremendous 2009. We believe that we are well positioned for strong performance as we continue to manage our portfolio to achieve an attractive total return over market cycles.

This concludes our prepared remarks and we are now pleased to take your questions. Operator?

(Operator Instructions)

Steve DeLaney, JMP Securities.

Good morning, everyone, and thank you for taking my question. I'd like to start on the commercial side, if I could. Commercial mortgage alert this morning on Page 6 announced that Ellington and its partner, LNR, had negotiated the B-piece on a new BofA/UBS deal.

The question is Larry is we see that a lot of activity for Ellington -- Ellington management in the B-piece sector. How much of that activity should we assume ends up in the EFC portfolio? Obviously, you have CMBS investments, but I guess I'd never asked the question -- the CMBS and EFC, are those B-pieces?

Yes, so I don't want to comment on a particular trade --

Understood.

But I'll tell you that so Ellington Financial -- a little under $800 million in equity represents, call it, between -- Mark, what would you say -- is it between, around 25%, 30% -- maybe around 30% of our credit?

Yes.

Credit portfolio. So that I think, all other things being equal, that's certainly one point of reference in terms of what portion we are getting there. But it really depends on in the case of Ellington Financial how much available capital it has in any particular time. It could have more; it could have less depending on a lot of the portfolio repositionings that we are doing, transactions we're doing in other sectors.

So I think maybe first order of approximation, 30% wouldn't be an unreasonable figure to use. But as we ramp up all these other strategies, there is certainly a chance that that will get crowded out a little bit. Ellington Financial does have the ability to take advantage of several strategies that our other funds don't because of the permanence of Ellington Financial's capital and we certainly take advantage of that.

So to the extent that we see opportunities in those other sectors and we're buying more of those assets that could mean that Ellington Financial is getting lesser, in some cases, new allocations. So the allocation process is completely objective and based on available capital at the time and what strategies each portfolio is eligible for. But like I said, it can be a little hard to predict in terms of on any particular transaction.

That's helpful. And you make an interesting point about the permanency of EFC's capital versus maybe that of some of your funds that are subject to redemption. So when you make that statement generally, without getting too specific, should we think that non-CUSIP type investments, such as some of the loans you are sourcing, those would be the types of assets that really match up well with EFC and maybe not so much with some of your other funds due to the reduced --

Yes, exactly. For that and other reasons, that's right. I would say that Ellington Financial, for example, in the case of non-QM origination, that's something that Ellington Financial -- first of all, given the fact that as you know, we've made those investments alongside strategic investments in certain originators, which certainly matches up well with Ellington Financial's capital. And also the fact that there is at this point, those are really more buy-and-hold investments since the market isn't yet developed enough for securitizations and the like. So absolutely right in that sense.

Thanks. Okay. And then you made special note of your consumer loans, I think, as one of your top two or three targeted areas. I have been reading a lot lately about a lot of online platforms and some of the partners.

And the theme is that platforms are being created for crowdfunding. You initially think, oh, that's just guys and gals on the Internet borrowing $5,000 or investing $5,000. But more and more, I'm reading about people like Blackstone, etc., large credit funds on the backend.

And I'm just curious if one of your sourcing strategies for consumer credit is working in partnership with some of these crowdfunding platforms? Forgive me if some of my technology terminology --

We are definitely taking a close look at that. Mark, you want to address that? No, you are right on. Mark, do you want to address that? It's definitely something that we are looking at.

So in that space, we view picking your partner as sort of critically important. So we have had a bias towards partnerships for companies that have been involved in types of loan origination for a while and that we believe have access to credit-worthy borrowers who have demonstrated an ability to handle debt loads in the past.

So we have not been to date interested in buying loans on a platform, such as Lending Club. We feel as though we've been able through partnerships to secure loans that we believe over the long term will have superior credit performance.

Okay. Got it. So maybe people that are non-bank -- so you made it very clear: you are not just using these technology-driven platforms, where there's very little credit analysis or value-add from the platform. You are working more with non-bank consumer lenders that are looking for secondary capital. I think that's what I'm hearing you.

So these would not necessarily be online type -- I guess it doesn't really matter whether they are online. But you are being able to underwrite loans that an experienced originator is producing, is that correct?

I guess the critical metrics to us are, is the person who is originating that loan, do they have some sort of history in credit analysis? And the other metric that's important to us is do they have access to borrowers that have demonstrated credit worthiness. And we believe have demonstrated an ability to effectively manage the increased indebtedness they are about to take on. Those are really two very important metrics for us and it's made us selective in who we've chosen to partner with.

Okay. Thanks. That's helpful.

Mark, tell me if you disagree with this. But without getting into too much detail, it is not something that we necessarily would dismiss out of hand to the extent that these are large platform, some of these, to the extent that we think that we can have some degree of selection, let's just say.

And so it's something that we definitely don't want to rule out going forward. We haven't done it yet, but I think it's possible that we could try to make it work under the right circumstances.

Yes, that's right. And we've put a lot of -- our research team has put a lot of work into analyzing the historical data. And I think we've learned a lot about how different types of loans perform. It's a function of numerous attributes. And as we continue that research work, I'm sure our thinking is going to evolve by sort of [mutate] with what we've done so far.

Right.

That's helpful. It sounds like you guys are doing this in your usual science lab kind of approach. And I think what I'll do is come back you off-line and pick your brain a little bit more on that.

One final thing -- and this is more obviously getting out of the weeds and up into the big picture. The story obviously in second quarter for all the hybrid guys was really this credit spread widening. I'm just curious any quick thoughts you have on have we seen any with material tightening thus far in third quarter, generally speaking. And if not, Mark, what's it's going to take to bring spreads back in a bit from where they have widened out?

I don't think there has been, generally speaking, material tightening. I think people -- I said in my prepared remarks. I think going into the year, there was a view broadly held by the market that credit was safe. And what made people really nervous was sort of interest rate risk.

And I think in the quarter, you've seen a lot about building credit spreads in a lot of areas. Larry mentioned European CLOs, some volatility in CMBS. There's obviously been volatility in distressed debt. And you know, some of this is a result of sort of material bad news. Like drop in oil prices; drop in commodity prices. I mentioned people reassessing potential cash flows and rep and warrant claims and certain deals in the non-Agency space. So there was some fundamental news that came out that I think caused people to reevaluate the underlying assumptions on certain credits.

Got it. And what I'm really hearing you say is that you had a lot of nervousness -- you mentioned the energy sector. So as the high-yield market basically -- spreads blew out in high-yield debt that that had a way of pulling spreads out on structured product.

Right. The newer CLOs have exposure there. So -- but I'd say for us, we're finding -- the markets paint with a broad brush. For us, we see lots of credits that are performing extremely well. For us, I think we're seeing more opportunities now certainly than what we saw at the beginning of the year to generate what we think are going to be very attractive long-term returns.

So while there's been some hiccups in credit in the market -- some of them technical, some fundamental -- the pricing structure we see for the amount of capital we're looking to deploy, it's a better environment for us than we've had before.

I understand. Understand. Guys, thank you so much for all the comments and congrats on putting up a positive TER for the quarter. Thank you.

Doug Harter, Credit Suisse.

Thanks. You guys now mentioned a couple times that you're seeing kind of more attractive return opportunities than you had been in a while. How do you balance that with the potential volatility that could be coming kind of later in the third quarter as you look to put capital to work?

I'll probably pass to Mark in a second, but the first thing that we do is we adhere to our -- what we think are very rigorous and well-thought-out cash and liquidity management guidelines. So as Mark mentioned, we don't want to overleverage illiquid assets and that's really been probably the primary principle that guides our liquidity management.

So when we see these opportunities, we know that we have to be disciplined. We know that we have to keep some degree of dry powder. And I think the way that we manage liquidity and leverage is such that we -- certainly what we hope -- is that even if we show ourselves as having a certain amount of dry powder, I think in our reality, we have a little more than that.

Because for a really great opportunity, our sort of standard metrics are conservative enough that we can at least temporarily even exceed that, based upon how we managed liquidity. And our leverage, as you know, has been quite low relative to the peer group with respect to our non-Agency assets. So that's really I think the first order of business.

Mark, do you want to add anything to that?

I would add two things. That's an excellent question, Doug. That has been -- that trade-off, that balance, has been the subject of a lot of our sort of commitment committee discussions in the last few months.

I guess there are a few things we do. One is we set the expected return target much higher on less liquid investments relative to more liquid investments. What we've done this year is we have rotated out of some of the non-Agency securities, which are relatively liquid, but ones that have reached a return target -- sort of reached a target price where the going forward return expectation looked like it was materially less than what we could get in some other less liquid investments. Larry mentioned Spanish NPLs or commercial loans. So we make sure that when we're going down in liquidity, there is a substantial yield pickup.

The other thing we've done in the less liquid investments is we have a bias towards things where the cash flows come back to us quickly. So we've like shorter-term loans. We like, on the commercial side, loans that we think have a quick resolution.

Because we think for a lot of the assets we buy, we have relatively good sense of how things work out in the next year or so. But I think when you are getting into investments that are six-, seven-, eight-year investments, I think your predictive powers degrade materially.

So I think it's making sure we get a much higher return target when we go down in liquidity and making sure the less liquid investments have more frontloaded cash flows or shorter spread duration. Those have been other two principles that have guided us.

Got it. And then just in terms of sort of sitting into your comments there, how big would you be willing to get through the illiquid -- the less liquid investments as a percentage of the portfolio? As clearly, those present the better return opportunities.

I think it's a function of we always want to be in a position where if the world gets choppy or the world gets hit by some sort of event that cause credit spreads to widen, that we want to be a buyer, not a seller. So we want to have either cash or other liquid investments that we can sell relatively easily without much of a price concession to be able to take advantage of turbulence. So we always want to keep dry powder measured in those ways.

Coming in the start of the year, we definitely thought it made sense to buy some of these higher-yielding investments. And we had ample supply of cash and liquid investments to do it with. We've done more of that rotation. I think there's still more to do.

But you're right: there's a limit. There's a natural limit as to how far we would go with that. So it's something we're watching. I think we definitely, if the opportunity is right, have room for more of these less liquid investments, but there will come a time when we will look at the portfolio and think that we want to be able to take advantage if you see further dislocations and which will cause us to say we are now going to hold up with that rotation and wait and see.

And I think, Mark, the other thing that we're taking into account now is that as we start to be able to get leverage on some of the less-liquid investments and if that leverage is secure -- for example, if it's not mark to market -- then that gives us more firepower in terms of our ability to buy more illiquid assets.

We're still -- if you look at the portfolio, for example, on page 11, you can see the first 4 of those slices starting with the biggest -- the Jumbo Alt-A going clockwise -- the first 4 slices are all securities. They are all reasonably liquid.

And that's almost half the pie. And then of course, you've got it lot of CMBS, you've got the European MBS, which are also reasonably liquid, and CLOs are all CUSIPs and reasonably liquid, certainly in the concept of some of the other things we are talking about.

So we've still get a ways to go. But I think one of the things that's exciting for us, for example, is we mentioned in the consumer space is that we have these loans, which, as Mark mentioned, have very short durations and where we are getting a substantial amount of cash flow each month.

But to the extent that we can lock in some financing that we believe is secure, then all of a sudden, that increases our ability to add assets there and not impact our dry powder, if you will. So that's something that we're definitely continuing to look at.

And as Mark said, it's really a great environment now, where a lot of the banks with the proper haircut are giving us -- seem to be willing to give us very good financing terms, because they are looking -- given their capital ratios now that under Basel are applying to repo, we can hit their bogey in terms of what kind of income they can earn, what kind of spread they can earn on the repo. And that's a good return on capital for them, which is tough for them to get these days.

And it works great for us because it's a still, as Mark mentioned, much lower financing rate than the yield we are getting on these assets.

Great. Thank you for that color.

Thank you. We have reached the allocated time for questions. Ladies and gentlemen, this concludes Ellington Financial's second-quarter 2015 financial results conference call. Please disconnect your lines at this time and have a wonderful day.