Ellington Financial Inc (EFC) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial third quarter 2015 financial results conference call. Today's call is being recorded. At this time all participants have been placed in listen-only mode. The floor will be open for your questions following the presentation. (Operator Instructions). It is now my pleasure to turn the floor over to Anya Pritchard, Investor Relations. You may begin.

Thanks Jackie. 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 and 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 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 today on the call 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 Anya. Once again, it's our pleasure to speak with our shareholders this morning as we release our third quarter results. As always we appreciate your taking the time to participate us on the call today. First some highlights. Despite difficult dynamics where global market volatility caused interest rates to fall and credit spreads to widen significantly across-the-board, Ellington Financial was still able to generate a small profit for the quarter. Our credit hedges insulated us from some of the impact of widening spreads, and we also benefited from the fact that many of the asset classes that we have been opportunistically rotating into as part of our portfolio realignment, like short duration commercial loans, and distressed small balance commercial mortgage loans, are generally less sensitive to movements in interest rates. 2015 has certainly been a challenging year so far, with a very high level of volatility. But we are excited about the investment pipeline we're building, and the opportunities we're seeing. Things are cheaper now, and there's less competition. As announced in our earnings release we refined our Capital Management strategy including a new dividend level, and an accelerated pace of share repurchases. I will elaborate fully on that later in the call. We will follow the same format 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 for questions. As a reminder, we have posted our Third 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. So if you have this presentation in front of you, please turn to page four to follow along. I'm going to turn it over to Lisa now

Thank you Larry. Good morning everyone. As you can see in our earnings attribution table on page four of the presentation, during the third quarter we earned net income of $3.9 million, or $0.12 per share. Our credit strategy generated growth income of $10.6 million, or $0.31 per share. Our agency strategy had a growth loss of $1.8 million, or $0.05 per share, and we had expenses of $4.9 million, or $0.14 per share. Our return on equity for the quarter was one-half of 1%, and on a year-to-date basis was 4.7%, or 6.3% annualized. In both our credit and Agency RMBS strategies during the third quarter, the significant tightening in swap spreads negatively impacted our results. Leading to losses on our interest rate hedges. In both strategies we hedge against the risk of rising interest rates.

Both strategies were also impacted by yield spread widening that affected most sectors of the fixed income market during the third quarter. However, in our credit strategy our credit hedges offset some of the impacts of the widening, and our agency strategy or pay ups increased during the period. Within our credit portfolio it's important to note that while the spread widening that took place during the quarter dampened our results, its impact was in the form of unrealized losses. We were not in any way forced to sell assets and realize actual losses. This can be seen by the fact that we actually generated realized gains of $12.1 million, or $0.35 per share. The majority of which came from our non-Agency RMBS portfolio, which we continue to sell down in favor of the other asset classes that we have been rotating into.

We also had a meaningful contribution to realized gains from our CLOs and non-performing residential and small balance commercial mortgage loans. That said our legacy non-Agency RMBS still represents the largest component of our credit portfolio, and therefore, has still typically been generating most of our income. However, during the third quarter the yield spread widening that occurred, and the resulting unrealized losses that we recorded, led to a reduction in its overall contribution to our earnings relative to our other asset classes. Non-Agency RMBS contributed approximately $0.10 per share during the third quarter, or approximately one-third of our total credit results. In comparison last quarter our non-Agency RMBS made up approximately 60% of our total credit results. Within our credit portfolio those asset classes which are less sensitive to movements in interest rates and the global macroeconomic environment include our consumer loans, our non-performing residential loans, and our small balance commercial loans. These three segments performed very well during the quarter, and combined to generate income of approximately $4.4 million, or $0.13 per share, an increase of approximately $1.1 million, or $0.03 per share from the second quarter. They represent approximately 42% of our third quarter credit results. The remaining 25% of our credit results came from income from our CMBS, CLOs including European credit investments, our relative value trading strategies, as partially offset by loss of interest rate swaps and unrealized losses on distressed net investments.

Over the third quarter the size of our non-Agency RMBS portfolio declined by about $84 million, and it is now approximately 50% smaller than it was at the beginning of the year. As I mentioned earlier, our agency RMBS strategy generated a gross loss of $1.8 million, or $0.05 per share for the quarter. An a year-to-date basis, however, this strategy has generated positive income of $5.8 million, or $0.16 per share, based on allocated capital of approximately 18% it has generated a nine month return on equity of about 4.2%, or about 5.6% on an annualized basis.

This was achieved in spite of extremely volatile interest rates and widening yield spreads over the first nine months of 2015. Throughout the trading we generated realized gains of $900,000, or $0.03 per share for the quarter, and $7.9 million, or $0.23 per share for the nine months period. At the end of the third quarter our total loan credit portfolio was approximately $655 million, down from approximately $753 million in the second quarter, while our agency portfolio was up slightly to $1.2 billion from $1.1 billion. Our debt to leverage ratio was up slightly relative to last quarter at 1.81 to 1, but remains lower than our historical norm. As we have sold some of our legacy non-Agency RMBS holdings, our leverage ratio has declined. However, as we continue to put additional repo and financing lines in place in connection with some of other our credit assets, we expect that over time our leverage ratio will increase. Our overall annualized investment income as a percentage of shareholders' equity was 9.2% for the quarter, and we project that to continue to rise, as we continue to realign our portfolio. Our expenses remain essentially on forecast, and our annualized expense ratio for the quarter was 2.6%. We ended the quarter with a diluted book value per share of $22.22, down just 2.3% from that of June 30th. Our diluted book value at September 30th includes the modest accretive impact of our share repurchase activity, which began during the third quarter. I will now turn the presentation over to Mark.

Thanks Lisa. To begin I'll quickly go through the market backdrop for the quarter, because at this point in the earnings cycle, others have covered most of it already. During the third quarter we got bad news about emerging economies, especially China, in what had previously been a fairly consensus view among market participants that the US economy was strong enough to shrug off this global weakening, was challenged in September, when the Fed decided not to raise the target federal funds rate. This left the market with the feeling that things were worse in the US than previously thought. This more pessimistic view was also reinforced by the weak September payroll report released in early October. Our portfolio was set up pretty well for all of this, the real outperformers as to credit market widened, were legacy structured products, including non-Agency RMBS and legacy CLOs. Price movements in these sectors were actually quite muted, and housing market fundamentals remained strong, while legacy CLOs vastly outperformed newer vintages. Every market draw-down in the past year showed a lower and lower beta of legacy structured products to high-yield corporate bonds and equities. We believe that going forward, structured credit will continue to outperform. We managed to avoid the real losers for the quarter, high-yield distressed debt and CLO 2.0s. CMBS also widened during the quarter, but we did not have a lot of CUSIP exposure, and unlike many others in this space, we had CMBX hedges in place. Many market participants are asking whether it's time to buy high-yield aggressively, but we're not convinced. The high yield market is becoming less and less liquid by the day, and cash is decoupling from CBX. Our fear is that if redemptions hit ETFs or large distressed hedge funds, prices will drop further on supply. In Europe, however our views are a little different. UK non-conforming loans whose performance looks good, did materially drop in price during the third quarter unlike US non-Agency RMBS. So we think that there is a real buying opportunity in this asset class. This quarter there were no changes in expected cash flows. Instead there were just lower prices. So we expect that our going forward investments will have a higher yield and a higher total return.

Let's look now at the portfolio of involved on slide 11. As you can see, we were busy in the quarter. We shrunk the portfolio by almost $100 million, primarily selling CUSIP securities. That performed well not only during the quarter, but over a longer time horizon. We sold seasoned non-agency RMBS, as well as both US and European CLOs. All of these sectors were relatively unscathed by the credit volatility in the quarter. In addition we deployed cash from these sales in higher-yielding sectors like consumer loans and distressed commercial loans. We have also been successful in securing some financing arrangements in some of these sectors.

This is particularly important because it is precisely in these sectors where we are seeing an enormous spread between available asset yields and available financing costs, in some sectors the yield gap between assets and funding can be 800 basis points. This is important because it should allow us to generate net income with just small amounts of leverage, which as you know is how we like to run our portfolio. As volatile spreads were in Q3 we still haven't seen how the market is going to react to a Fed hike during a time of weak liquidity, so operating with low leverage is vital. Our plan was to raise cash by selling sectors that trade at spreads around approximately 300 over the yield curve, and to try to reinvest the proceeds in sectors that we expect to provide double-digit yield.

We also thought it would be prudent to sell assets in Q3 as opposed to trying to do so at the end of the year. So now we have raised cash from these asset sales, and can be opportunistic coming into year-end. In general the newer investments we have added are yielding substantially more than what we have sold. And with a little bit of leverage the yield pickup could be tremendous. Slide 12 shows how far we have come since the end of 2013. Our non-Agency RMBS portfolio is half of what it used to be, and we now have a real presence in many higher-yielding sectors. Importantly our activities in consumers loans and commercial real estate are not easily replicated by others, so we believe that gives us a competitive advantage going forward. If you turn to Slide 14, you can see our credit hedges. They have a dual purpose. First they hedge against a weaker credit environment, and second, they partially hedge against asset spread widening. Our credit hedges helped us this quarter. Post quarter end the high yield indices have bounced back up without cash bonds following suit. We think there was a good reason to be concerned about high yields in leverage loans. There are lots of fundamental problems in the form of energy and commodity exposure, and now that CLO has shown to slow down, there are supply issues as well, as new limited CLOs had been the dominant source of demand for new leveraged loans over the past few years. So we like how we are positioned with credit exposure to the US consumer, US residential real estate, and US commercial real estate, hedged with short positions and high-yield. On the agency side, it was a tough quarter. Agency mortgages substantially underperformed swap hedges. We lost a little, $0.05 a share. I think it's important to remember that when a loss is caused not by fundamental factors, like a credit loss or faster realized repayments, but as a mark-to-market loss caused by an asset field widening relative to it's hedge, those losses can reverse. At quarter end the agency MBS was substantially cheaper than they were earlier in the year, and have performed well since quarter end. With that, I will turn the call back to Larry.

Thanks Mark. During the third quarter, we purchased our first batch of non-QM loans from one of the flow agreements we have in place. This included settlements on commitments that we had made late in the second quarter. The ramp-up has been slower than we had hoped, but we're launching a bunch of new products, and basically still just getting started. Some of the slow start was also just making sure that all of the origination systems were integrated properly, and now that those are in place, our primary non-QM source and originator in which we are a significant strategic investor, has significantly ramped up their non-QM sales force, just in the past 30 days. So we expect to really see things get going in November and December.

Our consumer loan portfolio is a key growth area for us. We continue to add to our portfolio under our flow agreements with originators. Our portfolio currently includes unsecured loans as well as auto loans. We have flow agreements in place with multiple originators, and we're seeing lots of new opportunities in this area. We are very selective as to who we will buy product from, what product we'll buy, including underwriting guidelines, and of course at what price. Our so we end up turning down lots of opportunities, but at the same time we have been able slowly but steadily, to increase our roster originators that are providing us consumer loan flow. We have also arranged financing on many of our consumer loans, and we expect to continue to expand our funding sources, which will encompass most of our consumer loan flow going forward. So with yields on this product that are already high on an unleveraged basis, as you can see on page 13 of the presentation, on a leveraged basis the yields are extremely attractive.

Shifting gears we've added two new slides this quarter to the presentation. Slides 29 and 30. Coming after Slide 28, which shows our dividend and book value since inception since our inception back in 2007 as a private company. Over the years we have often talked about many of the factors that we believe make Ellington Financial's returns higher quality returns, and about how as we achieve these returns, we try not to take too much risk in our overall portfolio management. The slides cover the entire period from Q1 2011 Ellington Financial's first full quarter as a public company, to the end of the second quarter of 2015, which was the latest available data we had for the hybrid mortgage rates. Specifically, we've often talked about how left leveraged Ellington Financial is, than the mortgage REITs generally, how carefully we are in our cash and liquidity management, how we can and do use substantial amounts of credit hedges to reduce risk, how we made such liberal use of TBA short positions to manage basis and issue rate risk in our agency portfolio. And let's also not forget 2007 and 2008, when as a 144 A company, Ellington Financial broke even through the most difficult markets ever for structured credit, will many M REITs at the time were crushed, or even went bankrupt. Many of the M REITs around today weren't even in business back then. We are much more time tested than those companies to be sure. While slides 29 and 30 speak to Ellington Financial's relative risk profile, as it has impacted book value and economic return, two key metrics in the space. Let's start with Slide 29. This slide shows the stability of our book value per share in relation to the hybrid mortgage REITs. Now obviously this doesn't include dividends, which are as important a factor in economic return as book value, and for an economic return we're going to get there on the next slide, Slide 30. This Slide 29 speaks only to book value per share. Why is stability of book value per share important? It certainly reflects that your portfolio isn't experiencing wild swings in value from period-to-period. It shows that you're being good stewards of your shareholders' capital by avoiding serial stock issuances at heavily diluted levels. It also shows that over time your dividend is approximating your economic earnings.

Now since every company sizes their shares differently, we had to normalize the graph to put every company on the same footing. So for Ellington and the 14 hybrid mortgage rates, we computed the average book value per share over the entire period for each company, and then graphed for each company the deviation of each of its book values from its average book value. As you can see, Ellington Financial, the blue line popping our from all of the gray lines representing the 14 hybrid M REITs, clearly stays the closest to the baseline, and the statistics bare it out. As you can see on the table to the right of the graph, EFC has the lowest standard deviation of the entire group.

Let's move on to Slide 30. This slide shows the same 15 companies over the same time period, but this time we're graphing the cumulative compounded economic return. That includes both dividends and change in book value, all compounded of course. There's a twist however, and it involves computing the sharp ratio, which is widely considered the gold standard of performance evaluation in the investment industry.

This will get a little technical now, so I apologize. Instead of just using the raw quarterly economic returns for each company, in computing the sharp ratio you scale-up or down each company's quarterly returns by the calculated risk of that return, as measured by the standard deviation of all of the quarterly returns over the period. And after doing that, you get the graph on the left of the slide. And Ellington Financial as represented again by the dark blue line, has the highest risk adjusted compounded returns. The sharp ratios were from the table on the right, represent the annualized compounded economic return for each company, divided by the annualized standard deviation of that company's quarterly economic returns. So Ellington Financial has not had the highest absolute compounded economic return over the period. It has had by far the lowest volatility of its quarterly returns, which helps Ellington Financial achieve the highest sharp ratio, basically the best returns per units of risk.

To conclude, I would like to discuss our Capital Management strategy. As announced our Board has set a new dividend level of $0.50 per share, which is $0.15 lower than its previous level. This is not reflective of any less confidence in our earnings power. In fact as we discussed earlier throughout this call, thanks to all of the better opportunities we're seeing in so many of the sectors where we have been adding, and all of the investment pipelines and sourcing capabilities that we are building, we are as confident as ever about the earnings stream we're creating.

We have set our new dividend at a level commensurate with where we see our leveraged asset yields trending, as we continue to realign our portfolio. We believe that once our portfolio realignment is complete, we will have established an earning stream that will cover our new dividend on a yield basis alone, even before taking into account our trading, that has historically enhanced our returns by hundreds of basis points. Now since we do mark-to-market for our income statement, and since we're active traders, our actual earnings will necessarily continue to fluctuate from quarter to quarter.

However, it is our expectation that over time and over market cycles, we will generate earnings in excess of our dividend level. Down the road if our leveraged asset yields trend even higher, and our mark-to-market earnings follow suit, we will consider recommending raising the dividend level. Initially we plan to use the entire difference from our prior distribution level, that $0.15 per share per quarter, or approximately $5 million per quarter to repurchase our shares. With our stock trading at such a significant discount to our assets, the values of which we are extremely confident, these share repurchases will be immediately accretive to book value, and will amplify the earning power of our assets for our shareholders. And in addition to making discretionary repurchases during our open trading windows, we also plan to enter into a 10-b-51 plan to ensure that we have enough trading days to implement these repurchases. Ultimately should our price to book ratio recover, or other significant conditions change, we will consider using this extra capital for other purposes appropriate at such time, such as increasing our investments in our most compelling asset classes, or perhaps paying special dividends to the extent that our realized earnings substantially exceed the new dividend level. I hope you all agree that slides 28, 29 and 30 demonstrate very clearly that over our history, we have paid substantial dividends to shareholders, while at the same time maintaining stability of book value, even through the most difficult of marketing environments.

These remain core objectives for us. In fact, at $0.50 per share per quarter, our new dividend level is still attractive by almost any metric, representing a 9% yield based on our $22.22 book value per share as of September 30th, and representing slightly over an 11% yield based on our November 4th closing price of $18.07. That said, while we recognize that some shareholders might prefer a 100% payout ratio, we also believe that it's important for us to be more focused on long-term value creation in the use of our earnings, whether in the repurchase of our shares when they're trading at distressed levels, or whether to build book value over time through retained earnings.

To succeed we recognize that first and foremost, we must continue to manage our investment portfolio, and enhance our sourcing abilities to take advantage of the best opportunities for high risk-adjusted yields, and the potential for growth in building a franchise value. However, we also believe that this refined Capital Management strategy is an important step in achieving our goal, which as always is to maximize long-term value for our shareholders. Please remember management owns over 10% of Ellington Financial. We are aligned with you, and we want to create long-term value for you. This concludes our prepared remarks. We're now pleased to take your questions.

The floor is now open for questions. (Operator Instructions). Our first question comes from the line of Steve DeLaney with JMP Securities.

Good morning everyone. Thanks for taking the question. Larry, I thought just to add to the slides 29 and 30, just to offer, that at this point in the earnings season we're calculating that EFC was one of just three of the 14 hybrid REITs that did have a positive total economic return in the third quarter. So tough quarter, but congratulations on being plus a half of a percent. I was really struck in the remarks both yours and Mark Tecotzky's, the amount of focus within EFC currently on non-CUSIP investments, and specifically you're remarks about the NQMs. Could you comment a little more about how you plan to finance the NQM whole loans, and with the range of targeted return expectations would be on that product? Thanks.

Sure. So the financing strategy for non-QM is two-pronged. First we're going to work with private lenders who, as we have discussed I think on earlier calls are, they are not as eager as the big banks to lends under agency because of the new capital rules. On non-Agency and certainly something like non-QM where they can earn a very healthy spread, they get a great return on equity for doing that, so I think we'll be able to finance, and we're working on right now one line, this product the non-QM product with banks. That's going to be a pretty high cost to fund obviously, in line maybe even slightly higher than what we see on our lower credit quality CUSIPs that we finance, but the other initiative that we have in place is Federal Home Loan Bank membership, and that is continuing a pace. We hope to get that done our target date is January, there we believe that we'll be able to get very attractive financing on a number of our asset classes, including non-QM and the funding levels there, as you probably know our [candy beat] so that's our strategy there, and the leverage returns using the private funding will be certainly very good, so if we can originate product say around 7% yield, for example, and finance that somewhere in the LIBOR plus 300-plus territory, that already gets us to our target return on equity levels, but with home loan bank financing in place, it would be just a quantum leap forward from there.

Got it. And you're obviously designing products in terms of CFPP rules, ability to repay, et cetera, that you think you're developing a product that would not be viewed as toxic or predatory in the eyes of the home loan bank. I would think they would be pretty picky about what types of--?

Absolutely. Yes. It's certainly something that we're not going to mess around with, and there are two sides to the coin, right? Three sides really, like you said, there's the regulatory side, but there's also the demand from the consumer side, right, in addition to what we're looking to get, we also have been working with our product mix, working with our partners here, to find different products that can gain traction amongst consumers.

Got it. Great. Thank you for that. One final thing. Over the last year you guys have been pretty creative in making strategic opportunistic investments, and based on your comments of value creation, seeing value in your own shares. You're trading about 80% of book, there are a lot of mortgage REITs out there that are well below that, so I'm just curious if you would see investing in the equities of some other selective mortgage REITs, maybe 60%, 70% of book if you would view that as a responsible allocation of capital, or an attractive allocation?

Yes. We do it a little bit, it's a long short strategy, Mark actually oversees that strategy as well. And so we do it. It's not a big part of what we do. We think that those companies are obviously like you say trading at a low price to book ratio, but we want to play things more on a long short basis, and we have limited capital, and we want to deploy as much as of it as possible, in the areas where we see the future basically coming down the road. These pipelines and the stuff that we have been rotating into. So I think it will continue to be a small piece of what we do, and we'll be opportunistic about it, but I wouldn't expect it to be a major part of our strategies.

Got it. Thanks for the comments.

Sure. Thanks, Steve.

And our next question comes productivity line of Sam Choe with Credit Suisse.

Hi I it's actually Doug Harter. I was just wondering if you could help us understand possibly how big the opportunity is, in whether it's the consumer loans or some of these non-QMs, just to get a sense of how scalable these investment opportunities are?

Yes. So in non-QM I would say that it's untested, right? We and others are out there, and we believe that this is a market where there's going to be a lot of demand from the consumer, and that obviously we have demand as well. It's been slow, but if you look at the origination numbers and we're still in a low interest rate environment, just getting a small percentage of that is big numbers for a company of our size. Mark, I know you want to add to that.

Yes. So our thinking with non-QM is we were fortunate enough to partner with a team that is very thoughtful about credit, and if you think about the mortgage market pre crisis. Pre crisis less than 50% of the loans were going through Fannie/Freddie/Ginnie, it was more than 50% were coming to market and were not getting a government guarantee on them. So for a very small investment to be able to partner with a really strong team to get out in that space, I think we view that as a great opportunity, and a great option value for Ellington Financial. We're starting to get loans in. The loans we're getting in look like very attractive. It's still small, maybe it will be small for a year or so, but when that market evolved, right, we now have a company in place, a program in place, and it can be very meaningful at some point down the future. I think it's just hard to sort of pin it down.

So I guess along those lines, how much of an advantage do you think it is to kind of be a first mover, or to be in position today, when maybe the opportunity isn't there yet, the size isn't there yet, but to be in position for a year or two years from now?

I think it depends on the burn rate of the business, right from so for us, we made a very small investments on the order of a few million dollars. We have been very parsimonious with how money is spent in that company, so we are looking to have a seat at the table, and be profitable without having spent a lot of cash. I think that's the key. If you told me you got to get into these businesses, and you got to sink millions of dollars into them before you know if it is ever going to amount to anything, I would feel very differently about it, but to partner with thoughtful credit people, to have an investment that costs almost nothing to run, I think it's a great opportunity for us.

Great. Thank you.

Our next question comes from the line of Mike Widner with KBW.

Hey. Good morning guys.

Morning.

So let me follow up just to make sure I understand sort of the nuances of the changed dividend policy, or I think as you called it, sort of your Capital Management policies. So I guess I just want to make sure I understand a couple of different statements you made, the prior dividend, $0.65 or so. You said you don't necessarily, because of the reduced dividend doesn't necessarily imply reduced earnings power, and you expect that earnings power to continue, and so I just want to make sure how to think about that on a per share basis?

Yes.

Yes. I will just stop there for a minute.

Yes. So we still think that we had sized $0.65 a share with the Board obviously, as where we saw our earnings trending with the portfolio alignment already completed, right? And it may take a couple of quarters for us to get there. So what this $0.50 dividend level implies, with that earnings projection, is less than a 100% payout ratio. So that's one fundamental change, right, to our Capital Management strategy.

However, at the same time we want to be opportunistic, and we see that our stock is trading, at times in the low 80% of book, and we want to use that extra capital that's been freed up by this lower payout ratio to buy back stock, and to buy it back at these levels which is accretive to the Company, and I don't have to repeat all of the reasons why that's a great use of our capital. The $0.50 level, why $0.50? So what we're looking at is we're looking at, Lisa talked our net investment income, projected to rise over time. We look at where our yields are trending, we look at what kind of leverage we're getting now in those assets, and where we might be getting them in the future, as we add for example there consumer loan financing arrangements, as we looking at getting closer to financing our distressed and small balance commercial loans.

There are a lot of things going on. But we see our leverage increasing, and what our goal is basically is to size our dividend at a rate where just the leveraged asset yield will cover the dividend. And then the other ways that we make money at Ellington Financial historically, and have over time stuck to rotation, active trading, things like that. That's just going to be the gravy, that will get us to, let's say hopefully the $0.65 level or higher. That's how we're thinking about the dividend in terms of sizing it now. As you know when we resize our dividend, we tend not to change it every quarter, if something changes we'll change it, right? But we want to be opportunistic, we want to look at where our leveraged asset yields are, but we also want to see where the opportunities are, either to buy back stock, like there's a great opportunity now, that might not last forever, to invest in certain businesses or asset classes that we think are tremendous. There will be another use to pay a special dividend. I mean we have lots of flexibility with our structure, right? We're not a REIT. We are a PTP, so we have that flexibility.

Great. And so if I was going to put, I mean just using your current share counts in those numbers, I mean that implies $22-ish million, the $0.65 dividend implies a $22-ish million earnings rate, the $0.50 dividend basically $5 million less than that, and I think you mentioned that in your prepared remarks, but all else equal stock continues to trade here, that would suggest buying back $5 million worth of stock.

That's right. That's exactly right. Yes.

Okay.

And we realize that we're going to be judged by our actions, not by our words.

Right. Well, hopefully the stocks trading back to book by the time the call ends, and you don't have to worry about that. But that is the follow-up, that is a commitment that makes a ton of sense, I think hopefully to investors, but like you said sooner or later maybe the stock is trading higher, and so you guys had long had a dividend policy, where you did target 100% payout, and then you sort of true-up at the end of the year with a special if whatever?

That's right. So this is a slight shift. That's right.

Okay. So even with the share repurchases and everything, if the stock price goes back up to a point where share repurchases are no longer economical, we don't necessarily count on the special dividend. It would be you guys are just going to reinvest that capital that you don't pay out, in what I think you're saying you would anticipate being ROE accretive or in an EPS accretive way?

Exactly. If our stock price is not at a place where that makes sense to use it to repurchase stock, then right, we would look at it for other purposes. Now that said, if we really, like I said, if we really fall substantially exceeded the dividend, or substantially then I think we would consider a special, but again not to get to 100% payout ratio.

Yes. Makes sense. And then I guess just the last one. I mean I know this isn't really, I'm not trying to pin you down it a specific guidance number, but what I think you were saying is that, and this is where I want you to tell me if I'm wrong, the earnings power as the portfolio normalizes or stabilizes or transitions, I think you are suggesting that just the pure net spread less operating expense parts is sort of $0.50-ish, low $0.50s kind of range?

Yes. At least. I mean you can look at the net investment income number that Lisa quoted, yes. So at least. That's right. And we see that getting better, but we want to be conservative.

I am not sure what the transition is, but I think at least based on my numbers, you are kind of already there now.

Yes. I think that's what I just said. That's right.

And I thought so. I wanted you guys and I might be misreading something. Alright. Well, listen I appreciate and I think I will let go with what Steve said. Nice job on the quarter, it was a tough quarter, and you guys still seemed to be working the magic, so congratulations on another solid quarter.

Thank you.

Our next question is from the line of Lee Cooperman with Omega Advisors.

Yes. Hi thanks, by the way let me compliment, I think your presentation is quite comprehensive. I might not be happy about the price of stock, but I think your presentation is quite comprehensive, and is to be complimented. I just wanted to make an observation, first a question. Given they way that you intend to manage the Company going forward, in terms of the amount of leverage you would choose to employ, what do you that a reasonable return on equity would be over a cycle, if you had to make a guess? I understand presently the dividends is a 2% return, 11% return at market, 9% return on book, but over a cycle, do you guys have a view of what you think you can generate in the a way of ROE?

Yes. I think around 12%.

12%. Okay. In my opinion 12% ROE in today's world, could change if interest rates change dramatically, would command something around book value as a reasonable price, and the only issue I take with you, it's not really strong, but $5 million a quarter is $20 million a year is a little bit over a 3% of the market cap. If I own 10% of the Company, and I could buy something at 80% or less of book value, if I could earn 12% of book, I would buy more than 3% a year back. So I would just encourage you to be flexible and open minded. One of these days we will get into a bear market, and who knows where stocks will trade, but we should be attuned to taking advantage of it.

I appreciate that. Totally agree. I think we're right now we're at a level in a low 80's, where I think I may leave it on our call that we had at some point in the past, you suggested that maybe that wasn't even the most compelling entry point, in terms of buying back stock, but we're going to be buying back stock even at this level. If it goes much lower than that, absolutely, that could be very appropriate for us to ramp that up higher.

Again, I want to compliment you. Very comprehensive presentation.

Thank you Lee. That means a lot coming from you.

Now I would like to turn the call back over to management for any additional or closing remarks. Ladies and gentlemen, this concludes Ellington Financial's third quarter 2015 financial results conference call. Please disconnect your lines at this time, and have a wonderful day.