Ellington Financial Inc (EFC) 2016 Q1 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial, first-quarter 2016 financial results conference call. Today's call is being recorded.

At this time all participants have been placed in a listen only mode and the floor will be opened for your questions following the presentation.

(Operator Instructions)

It is now my pleasure to turn the floor to, Maria Cozine, with Investor Relations. You may begin.

Thanks Crystal. 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 10K, filed on March 11, 2016. Forward looking statements are subject to a variety of risks and uncertainties that could cause the Company's actual results to differ from its beliefs, expectations, estimates and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events.

Statements made during this conference call are made as of the date of this call and the Company undertakes no obligation to update or revise any forward looking statements whether; as a result of new information, future events or otherwise. I have on the call with me today Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky our Co-Chief Investment Officer; and Lisa Mumford our Chief Financial Officer.

As described in our earnings press release, our first quarter earnings conference call presentation is available on our website EllingtonFinancial.com. Management's prepared remarks will track the presentation. Please turn to slide 4 to follow along.

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

Thanks Maria. And welcome everyone to our first quarter 2016 earnings call. We appreciate your taking the time to listen to the call today.

On our last earnings call in February, we discussed that we have been structuring our credit portfolio to be long consumer credit risk and short high yield corporate credit risk. And as disclosed in the fourth quarter earnings presentation for that call, heading into 2016, we had about triple our hedges in corporate credit, as compared to where we have been heading into the fourth quarter.

We explained that the balance sheets of consumers represent the underlying borrowers for RMBS and ABS, were in much better shape in the balance sheet, of high yield corporate issuers and that this was all compounded by the fact that for MBS and ABS housing prices were well supported on the high yield corporate side, debt covenants had only been getting weaker. We also presented our strong convictions on this portfolio repositioning on two fronts.

First, that the high yield corporate market was over valued, an extremely vulnerable both on a technical level and a fundamental level to market shocks. And second, that on a relative value basis, the yields that we expect to realize on our long credit portfolio, will ultimately outpace the yields on our short credit hedges. Quite simply, this high level portfolio positioning, being long structured credit while short high yield corporate credit, drove our loss in the first quarter.

As Mark will describe, it was a quarter of wild swings and there were many technical factors in play. That caused the February and March decoupling, between structured credit and high yield corporate credit.

Technical factors aside, our convictions remains strong and so we have maintained our long structured credit, short high yield corporate credit stance. And by the way, some of the decoupling has reversed since quarter end. Obviously, given the swings in our credit hedges we're managing our credit hedging portfolio extremely closely.

However, we are not losing sight of our longer term business plans and I am extremely pleased with how that's has been going. I will expand more on that later.

But for now I'm going to turn it over to, Lisa

Thank you, Larry. Good morning everyone. The earnings attribution table on page 4 of the presentation breaks down our results for the quarter into our credit and agency strategies and shows you the contributions from the main components within each.

You can see that in the first quarter we had a loss of $17.9 million or $0.54 per share from our credit strategy and a loss of $200,000 from our agency strategy. After expenses, we had a total net loss of $23.2 million or $0.69 per share. Within our credit strategy, we had solid contributions from interest income and net realized gains but these were overwhelmed by mark to market losses on our net credit hedges and our investment securities.

The net spread tightening that occurred during the quarter on high yield corporate debt indices had a significant impact on our results for the quarter. Given that most of our credit hedges are in the form of credit defaults swaps referencing high yield corporate bond indices. In addition, widening credit spreads led to valuation losses on many of our structured product security holdings, including our non-Agency RMBS, CMBS and distressed corporate debt.

I would like to emphasize though, that losses on these assets were principally unrealized and in fact we had net realized gains from the sale of certain assets within these categories. In particular, during the first quarter, we continue to sell down our non-Agency RMBS and CLO holdings and we reinvested the net proceeds in our other target assets, principally our loan portfolio. And in doing so, we generated net realized gains of $0.08 per share.

Also impacting our credit results for the quarter were declining interest rates, which lead to losses on our interest rate hedges, which are principally in the form of interest rate swap. On a quarter-over-quarter basis, interest income and our credit strategy decreased 12% to $13.6 million contributing to the decline was the decrease in our average holding for CLO's low-equity and CMBS B-pieces, which typically carry higher yields.

The net reduction in our Agency RMBS portfolio also caused our interest income to decline. At the same time, our loan portfolio including consumer loans and non-QM mortgage loans continues to grow partially offsetting these increases. In addition, whenever one of our non-performing commercial or residential mortgage loans converts to REO, any income earned on that asset from that point forward, is no longer classified as interest income, but instead it flows through our interest income statement as unrealized gain, until the REO is finally sold.

During the first quarter we had positive contributions from our consumer and mortgage loan portfolios, including a particularly strong contribution from our small balance commercial mortgage loans. With respect to this asset class, our results can vary from quarter to quarter as assets are resolved or move closer to resolution. Over the first quarter our portfolio of credit securities declined, while our holdings of loans increased.

You can see this on slide 13 of the presentation. You can see back on slide 4 that our Agency RMBS strategy essentially breakeven for the quarter. Positive results from our bond portfolio were offset by losses on our interest rate hedges.

Our interest rate hedges accounted for the bulk of the losses within our Agency strategy -- interest rate swap -- I'm sorry. Our interest income declined approximately $400,000 or $0.01 per share. Our portfolio holdings declined approximately 3% quarter-over-quarter and as a result, our interest income declined. We had a positive catch-up premium amortization adjustment of approximately $350,000 or $0.01 per share, which partially offset the impact of the decrease in the size of our portfolio holdings.

Excluding the catch-up premium amortization adjustment, quarter-over-quarter yields on our agency portfolio, declined just slightly from 3.06% to 3.04%. Our weighted average borrowings declined quarter-over-quarter by approximately 11%, but our repo cost increased.

First, the cost of repo generally increased over the course of the first quarter. You can see the components of our cost of repo on page 23 of the Investor Presentation. Second, our credit related borrowings constitute a higher percentage of our outstanding borrowing, which increases our overall average borrowing rate.

In addition, while our credit repo borrowing cause for the quarter only increased slightly, our average credit repo costs as of the end of the first quarter increased to 2.7% from 2.47% at the end of the fourth quarter. Some of our credit related borrowing costs have shifted from our security holdings to our loans. And these facilities used to finance our loans, generally tend to be slightly more expensive than facilities used to finance securities.

As of March 31, we had financing facilities in place for our consumer loans, our non-QM loans and our small balance commercial loans. We ended the quarter with a diluted book value per share of $20.63 down from $21.80 at December 31, 2015. Our diluted book value per share as of March 31, includes a $0.02 accretive impact of our share repurchase activity that occurred within the first quarter.

I will now turn the presentation over to Mark.

Thanks Lisa.

We were disappointed in our results for the quarter, but the silver lining is that a book value drop was not caused by fundamental credit weakness or realized losses. Both rates markets and credit markets have very violent moves during the quarter, as of often the case with big market moves in the short period of time. Relative value relationships did not immediately repriced efficiently.

The high yield corporate bond indices that we were short, out performed the cash files that we were long, resulting in a mark to market loss in the first quarter, but in the relative calm markets of April and May, some of the under performance of cash bonds has reversed. And our forward-looking earnings power has improved.

We have secured better financing for our loan strategies, and we continue to add loans to our portfolio through our flow arrangements. At this stage in the earnings cycle, a lot has already been said about what happened in the quarter. We would characterize it as a shock that effected all markets and was centered around concerns about corporate credit stemming from lower commodity prices and periods of slower global growth.

Turn to slide 10. This illustrates two important points about the price [transaction] in the quarter, here we take the S&P 500, a high yield Index and an index and CMBS subordinate bonds. We normalize all their prices to [100] at the start of the quarter.

The first thing to note is that the three different indices, with different fundamental risks, were all highly correlated and all hit their trough on the same day, February 11. This is symptomatic of a market driven by fear and what happens in shocks when the over leveraged investors need to reduce risk quick -- need to reduce risk in a hurry due to correlations go up.

The second take away is that while the S&P in the high yield index recovered more than what they had lost, [an entire] for the month, the CMBX index which has been down over 20% of the trough, still ended down over 10% for the quarter.

Cash bonds did worse than synthetics so our assets which consist mostly of structured credit bonds consumer mortgage loans under performed high yield indices for the quarter, despite not having any deterioration in the fundamentals. We came into the year concerned about a corporate credit event with our portfolio more credit hedged than it had been in a while.

So by mid February, we were approaching markets with a healthy dose of fear and excitement. Unlike others in the space, our book value have been protected and we're starting to see some of the most exciting investments in years and selectively added positions of big discounts to prices at the end of the year.

By the end of March, it had all reversed with markets cheered by further stimulus by the ECB and the BOJ and the recovery in oil prices. In the second half of the quarter, liquid indices, like the S&P and the high yield index led the rally. Primary dealers are now less willing to backstop markets and risk-off moves and they can't carry big inventory satisfy demand in risk-on moves.

With dealer inventory's of individual [cash instruments], so much lower now than they used to be, more and more investors tend to indices to quickly put on or takeoff risk and so cash assets now tend to lag the indices in big moves. The result of all this, was their structured credit products, cash bonds are down in price. While our hedges were up in price.

We showed this on slide 11, yield in our portfolio after projected losses is the dotted blue line. On the green line is yield in the high yield index assuming zero losses. By the time the quarter is over, you can see our securities portfolio had widened over 150 basis points in yield relative to a high yield hedge.

We do not perceive this under performance as a result of divergent credit performance of our longs and shorts. If anything, we think the opposite is happening. US consumers performing well, helped by lower gasoline and utility costs.

We viewed this divergence as a timing mismatch and how different instruments react to risk-on and risk-off move. 100 basis point-plus -- basis move in the quarter is a very large move and liquid indices lead the way in big moves. Since quarter end, we've seen a partial reversal. The high yield corporate bond indices have declined since quarter end and cash bonds including structure products have appreciated. So we are seeing a correction since quarter end, which is benefiting us.

The result of all the regulations that have impaired liquidity and constrained deal activity naturally leads to world where relative value relationships, were more volatile, are more volatile and can be coupled over the timeframe of a quarter. But we are not managing Ellington Financial with a focus on quarterly returns. Instead we're focused on total returns over market cycles with three primary goals.

First, to generate higher returns and credit other credit strategies and with lower volatility. Second, to create franchises within Ellington Financial, that will create high yielding assets for the Company and be recognized equity investors for enterprise value. And third, to avoid big capital destruction during times of stress.

These goals underlie much of our evolution in the past several years and helps motivate our strategic moves into consumer loans, non-QM loans, CMBS B-pieces, et cetera. In fact, the post crisis regulatory environment that is created this cash synthetic volatility, that caused a short term loss for us in the quarter, is the same regulatory environment that's keeping banks away from many lending markets and that's giving us these lending opportunities that didn't exist [insight].

I would also like to add that over same year history the EFC has generally taken a lot of credit risk and shareholders have been rewarded for that exposure. The current market like 2008 and the second half of 2011 is a market where we think shareholders are better served having some of their credit hedge with high yield corporate credit.

At current prices on our hedges we estimate that even if corporate default rates don't increase from current levels, being short the high yield index will only cost us about 200 basis points annually. Which represents only a small give back on the [10.79%] estimated yield on our credit portfolio as you can see on slide 15.

It made some quarters temporarily create some additional book value volatility, but their primary purpose is to protect book value from large credit widening events in that regard they were successful. We are in fine shape in mid February, so what's the opportunity now? We've added some assets in the quarter and have added more post quarter end.

The big relative value change between cash assets and liquid hedges incentivizes us to do that. The flow arrangements and relationships that we have in place have taken years to develop are now providing a constant pipeline of assets -- a consistent pipeline of assets, where we can shape and closely monitor the credit parameters.

Additionally, we have secured financing for these assets. Which increases are buying power and improves our earnings potential. We saw good credit performance on our portfolio in the quarter, both on securities and loans.

The combination of good credit performance in the first quarter spread widening, have pushed the estimated yield on our credit portfolio to almost 11% unleveraged. One of our primary jobs as managers, is to differentiate between liquidity of driven price drops and fundamental credit impairment and to invest aggressively, when liquidity driven price drops are current fundamentally sound credits.

Keeping that discipline is our focus. We view the current market as filled with opportunity to drive returns for shareholders. With that I will turn the call back to Larry.

Thanks Mark. It's easy to Monday morning quarterback the wisdom of having credit hedges in the first quarter. Or our particularly choices of credit hedges. Please turn to slide 25.

I would like to remind everyone that it was our credit hedges that enabled us, that enabled Ellington Financial to have positive P&L in 2008. And that our credit hedges even made money in 2009, despite one of the biggest bull markets ever, when you would expect credit hedges to lose money. We have a great track record hedging credit.

Even in the tough first quarter just past, it's very much worth noting, that it was our CMBX credit hedges, that enabled us to eek out a positive return in our CMBS strategy. Despite the absolutely horrible overall performance of the CMBS market, as illustrated on slide 10.

Going forward into the rest of 2016, and beyond, we will continue to focus on executing our long term business plans. Despite the mark to market loss in the first quarter, I am confident that we are poised for success over the long term. As we continue to build our proprietary investment pipeline and adapt to changing market conditions.

In our consumer loan business, our non-QM origination business and our distressed commercial mortgage loan business, we're utilizing exclusive relationships and special financing arrangements that are designed to produce a steady sustainable earnings flow. Our proprietary pipeline for consumer loans is growing. As we increased our consumer loan portfolio by 25%, by purchasing loans under our existing agreements, as well as, under an additional flow agreement with a new originator.

We continue to actively evaluate originators and the consumer loan space and anticipate adding more flow arrangements. In our non-QM business, loan performance has been excellent to date. The number of states for which are loaded been originated has also increased according to expectations and a portfolio of loans is ramping up nicely.

Our distressed small balance commercial mortgage loan portfolio continues to see assets successfully resolved and replaced at a strong pace. In this business, many commercial mortgage loans that were originated in periods with low underwriting standards, continue to hit their maturity dates and many of these loans are unable to refinance creating a steady flow of opportunities for us, at distressed prices.

Financing opportunities continue to be excellent for all three of these businesses. And in the quarter we closed on new facilities for non-QM loans and distressed small balance commercial mortgage loans. We also increased our existing credit lines and consumer loans.

The next step for the financing of our consumer loan business, will be to access the securitization markets for long-term financing. We expect to tap those markets later this year and this should free up capital to help us further increase leverage and enhance our earnings potential. Within all of these growing loan businesses, macroeconomic conditions are very supportive and we continue to see excellent loan credit performance.

Slide 14 illustrates vividly our business realignment over the past two years. On the right hand side, you can see that at the end of 2013, RMBS represented 82% of our credit portfolio.

On the left-hand side you can see that as of March 31, RMBS represented only 28% of our credit portfolio. And at the consumer loans to consumer ABS business alone, had already drawn to represent 22% of our credit portfolio and rising. Ellington invested heavily in both people and infrastructure to get to this point.

But we believe that we are now extremely well positioned, not only for the opportunity that exists today, but also for those opportunities that we anticipate will continue to unfold later this year and in the coming years.

Meanwhile, on slide 15, you can see that the average yield of our credit portfolio was up to 10.79% as of March 31. That portfolio yield was only 7.29%, at year end 2013. As you can see by pulling up our fourth quarter 2013 earnings call presentation on our website.

As you can see, on slide 31 and 32, I continue to have good reason to be proud of our outstanding performance relative to the Hybrid Mortgage Reed Group. Both in terms of the greater stability of our book value and our superior returns per unit of risk.

However, given where our business is going, especially our consumer loan business, at some point soon we may start comparing ourselves to the [REITs]. As I believe we are approaching the point, where we will be more accurately described as a highly diversified specialty finance company. In light of the significant discount to book value that are shares are traded, we've continued to execute under our share repurchase plan.

Including the post quarter end period, when we were continuing to repurchase shares under a 10-B-51 plan. We repurchased $5.2 million of our shares, within a accretive effect of about $0.03 to our book value per share. Our capital management strategy will continue to be opportunistic and flexible.

Our goal is and has always been, to maximize long-term value for our shareholders. With our ongoing business development and portfolio diversification, our discipline hedging strategies and risk management and strategic capital allocation, I am confident that over the coming quarters we will be able to both capitalize on opportunities and enhance franchise value.

This concludes our prepared remarks. We are now happy to take your questions. Operator?

(Operator Instructions)

Jessica Levi-Ribner, FBR Capital Markets.

Good morning, guys. Thank you for taking my question.

Good morning.

My first question is just on, you made some comments around the unrealized losses in your credit portfolio. But then you took net realized gains that were about $0.08 per share. Can you talk a little bit about if you monetize those assets today that cause you unrealized losses, would you also be realizing a gain? Meaning, in other words, is that kind of a model mark, but in the market you would probably get a better price for them?

Jessica, you can see on the -- our holdings table in the earnings release, the market value compared to amortized cost. And that will tell you -- I am just turning to it, just a second.

Right. I see it.

Right, so you can see the fair value compared to cost. I'm at the bottom of the -- of page 7 of the earnings release. You can see the different categories. Fair value is greater than cost. We would monetize that gain. Each category is listed there for you. You can see that, in total, the fair value exceeds the carrying value.

Okay, great.

Does that answer your question?

It does.

I just want to add, when we're making a decision whether to sell something, we are not looking necessarily at our cost basis. That could be a long time ago. And whether that's going to cause a realized gain or an unrealized gain or loss for that matter. So I realize gain or loss.

So I think that we're just going to look at where we can sell that security or unwind that hedge, what we think about that hedge in terms of whether it's going to work for us going forward or whether the security has more upside versus downside. So, not something that we necessarily focus on so much -- really, at all I would say -- in terms of how we manage the portfolio.

We -- when we have some unrealized losses like we did this quarter, I think that -- whether it be on the credit hedging side or on the long security side, obviously we're always going to be reevaluating our thinking, but if anything, I would say, all other things being equal, that we would normally think that, that would create more opportunities for us. But we're always flexible in terms of our thinking.

Okay. That's very fair. And then, maybe piggybacking off of that, with the appreciation and I think the right mentality, in my opinion, of playing the long game, how do we think about your -- what are your thoughts around deploying capital via share repurchases and then kind of maintaining liquidity, because this market is so, I guess we will call it, interesting -- and could become more so as we go into June Fed meeting. How can we think about that?

We always want to maintain liquidity, and risk management, liquidity management is -- that's always going to come first. In terms of share repurchases and how that interacts with that, I mean, it's a function of that, it's a function of the opportunities that we see, and it's a function of how defensive a posture we want to take.

I would say that our share repurchases were more compelling in prior quarters when we were buying, I think, in the high 70s, mid- to high 70s of book. Often. If not lower at times. Now, I think recently our stock was approaching -- was probably 84% of book at one point. It's traded up a little bit from there. But now you're getting to a place where it's becoming less compelling.

So we're going to be flexible and opportunistic. And we bought at the same pace, really, for the last few quarters. But, like I said -- I think I indicated this when we first started the program and in response to some questions -- as the price gets higher, as the opportunities get better, that could change. We are not wedded to do -- we're not wedded to anything and we're going to be flexible about it.

Okay, great. Thank you very much.

Douglas Harter, Credit Suisse.

Thanks. This is kind of a big picture question. I think one of the things that has differentiated you guys, and I think you even have a slide on it, is that you have had lower volatility returns. And I know March is one month, but the volatility you saw in March and in the first quarter, does that change any of the risk tolerances, risk bands that you look to have on the portfolio and results?

Hey, Doug, it's Mark. So I think a few things. One is that we mentioned it in the prepared remarks. We think the world we're in now, where dealer balance sheets are smaller, dealer appetite to take VAR -- value at risk -- has decreased. We think that is going to lead to a world where there's going to be more volatile bases between different structured products and credit assets -- CMBS, high yields, investment-grade corporates, non-agency mortgages -- so we think that there's more volatility. We also think that, that constraint on the dealers and the reluctance on the part of many banks to take part in lending at higher yield levels, we think that's created a tremendous opportunity for us.

So the opportunity is created, is much better than I think the negative consequence of a little bit of extra volatility. I think a little bit is, you have to think about not just the endpoints -- end of the year versus end of the first quarter -- but where things were within the quarter. So I would imagine -- I don't know, we don't have a crystal ball, but if everyone published their book values on February 11 when the market was in the depths of distress, I think our portfolio -- I know how our portfolio did, it was holding up extremely well. I think there are probably some others in the space that would've had material book value volatility.

So if February 11 had been the end of the quarter, I think our strategy would have been viewed as a strategy that preserves book value. And we definitely think that over cycles, having -- given the pricing of some of the high-yield indices now, we think that strategy of having some portion of our credit risk hedged with that, makes a lot of sense. And I think it's -- over time, it's a book value reducer, even though just looking at end of the quarter snapshots in this case didn't show that. The end of the quarter turned out to be a particularly unfavorable snapshot for us. But I definitely think it's a world where you can have a lot of volatility, and having some credit hedges in place right now, especially in front of an uncertain Fed, makes a lot of sense.

I just want to expand on that. So, when we have the structure right now in our book, with long structure credit and short high-yield credit, that's clearly going to create some short-term volatility. And so -- which is going to translate potentially into some book value instability. But I would argue, as Mark just implied, that those are -- should be relatively contained, and what we are really trying to do was to protect ourselves against a big move. And in a big move, if you had seen the long side of the portfolio really drop a lot, and not have anything to show for it on the short side, that's really what we were, and are, trying to protect against.

So, I think that, given that you've got a long that's in one market and a short that is in another market -- although still a credit market -- you're going to have some volatility. We did this in 2009, for example. We did it very successfully. We were short a lot of different forms of corporate credit there. And it really worked to our advantage. And that's when we were, of course, again, long at that point. It was just long purely mortgage credit.

So, we have done this before. We've done it successfully. You're going to have, when you're in two different markets, your hedges versus your assets. Even, frankly, if you're hedged CMBX versus being long the mortgage side, and if you're short on commercial mortgages and you're long residential mortgages, you're going to -- that's going to create volatility. Hedges are almost always going to create some volatility. It's not like our agency strategy where, if we use TBAs versus specified pools is really, really controlled. This is going to create a little more volatility. But I think it's going to create a little more volatility that's contained, and it's going to protect ourselves against really big moves, which is what we were concerned about going into the year and what we saw in the first six weeks of the year.

That's helpful. I guess one other thought or question, as you guys referenced with the dealer balance sheet being constrained and different moves in cash versus synthetics. Does that -- the phenomenon of, again, dealer balance sheets constrained unlikely to go away. Does that kind of basis risk cash versus synthetics change the way the you think about hedging in any way or, again, is it looking to capture the big move and, over time, that will -- they'll catch up to each other?

Yes. There's no doubt in my mind that, for big moves, hedges reduce risk. And that's really critical. And so, the market ended in a different place for the quarter. A very different place than where it was middle of the month. There was a lot of central bank intervention. But, for us, we need to make sure we're protecting the book value over a range of possible events that can happen.

And if that means, in a certain quarter, a hedge is going to move 1 point up and an asset is going to move 1 point down, that's fine with us. We will accept that. The key thing for us is, focusing on fundamental credit and making sure we have a high-yielding portfolio and are securing a pipeline of credit-sensitive assets that are going to drive returns in the future. That's, to me, the most important thing that's going to drive returns for shareholders in the future and over cycles.

Great. I appreciate the color.

(Operator Instructions)

Eric Hagen, KBW.

Thanks. Good morning.

Good morning, Eric.

How are you? I think my question sort of speaks to that book-value containment discussion, but would you say that your decision to operate with lower leverage is more of a reflection of how you see it in the current environment? Or is it more of a fundamental belief in the way Ellington manages money, that a levered strategy doesn't necessarily produce a higher-quality portfolio?

Yes. I mean, it's a little bit of both. Keep in mind that we are also still ramping up parts of our portfolio, right, and so I'd say you are right. It's a combination of being in defensive posture right now, but it's also continue to ramp up the new businesses.

So, we are certainly hopeful that, as those businesses ramp up, we will be increasing our leverage certainly in those businesses, and part of that -- I think I indicated before -- is going to depend upon the type of financing arrangements that we have in place, as well as in terms of pipeline, but we are really optimistic about that.

So I think that we are operating right now at a lower level of leverage and risk than we have been historically. So I would expect that to change and -- meaning to increase our leverage and risk over time. Some of that is going to depend, obviously, on when our radar goes up in terms of what we think is too much risk in the market, then of course we will dial it down. But I think, in terms of looking at a longer-term trend, absolutely, we are looking to increase our leverage but in the right spots.

At the end of this year, or even heading into next year, what percentage of the -- of your leverage would you say would be non-recourse financing as opposed to recourse?

I think it's really not a matter for us of recourse versus non-recourse in terms of how we -- that's not how we think about it. I think we think about it in terms of how much of it is locked in, for what period of time, what are the mark to market, whether a financing has what the mark-to- market risks are for variation margining. So, for example, if you have long-term -- if you have a securitization, like we are looking at doing later this year in consumer loans, then that's long-term financing that's not subject to variation margining.

I wouldn't put -- I have never put too much credence in the whole recourse versus non-recourse financing thing because, let's face it, you don't -- other than in the securitization context, right? But if we've got a line with the creditor, which is a major creditor of ours -- whether that be recourse or non-recourse -- you're going to have a tough time walking away from that creditor, even if it's technically not a recourse, when that creditor is potentially a big counterparty of yours on many other financing transactions. So -- and, frankly, most of our repo is not -- I believe, if not all of our repo -- I mean maybe there's one exception, I don't know, Lisa, I don't remember. But repo is almost always recourse. So, you're really talking about securitizations when you're talking about non-recourse. And, absolutely, that is an important component of our medium-term, I call it, plan in these businesses, whether it be the consumer loan business or the non-QM mortgage business, where that market -- securitization market still isn't where we would like it to be, but that's definitely something that we wanted to get to in that business.

Right. Thanks, Larry. Then I guess a bit of housekeeping -- on slide 28, you guys list the net spread on both agency and non-agency, but I think that it excludes hedging costs.

It does.

Yes.

What is the margin on both of those strategies, if you include hedging?

I probably don't have that handy, do we? That's something that we will have to get back to you on. I think, for example, so many of our hedges right now are in high yield that, that's really based upon the way we think of it, as we said in the call today, is that -- we think of that as what the expected run rate is on the high-yield assets that underlie those indices. So, we think of that as maybe 200 basis points, but other people could come up with a different number.

Obviously, if corporate credit goes through higher default rates and severities, then that number could even turn negative. You could have negative implied hedging costs on that. And then, in the meantime, everything is mark to market through our income statements. So, there is a lot of volatility there.

I think -- we like to think of those corporate credit hedges as having, like I said, about 200 basis points of cost for us, assuming that default rates stay about where they are. Then you've got our interest rate hedges and you can see that, in the current environment, those really aren't costing much as before, it's probably going to be a one handle for sure, right, in terms of our interest rate hedges. And then you've got just the cost of financing which is in there. So, (technical difficulty) the interest rate swaps are in there, too?

No. This just reflects the cost of finance.

Right. So, take those cost of finance numbers which are in there already, add another 1% or so -- again, this is just off the top of my head, don't [hold it to me] -- for the interest rate cost, and then add another 2% for credit hedges. But I would argue that 2% is a conservatively high number.

So if I assume like a mid-teens ROE on the agency and low-teens ROE on the credit, would you say that's fair?

I would have to think about that calculation. Remember, also, these yields that you see here are based on (technical difficulty) to finance cost, right, because that's the way that we want this chart right here to tie to our book yields and our income statements. So market yields, as you can see on our other slides, are higher.

So it's not -- that slide on the asset side, if you are trying to forecast what we would call earnings potential from leverage net interest margin is probably not the best slide to look at for that side of the balance sheet.

Got it. Thanks for the great market color, as always, guys.

Thank you.

Jim Young, West Family Investment.

Hi. Good morning. Two questions. Number one is, you made the comment that you think, over time, that you will be viewed less as a hybrid mortgage re and more like a highly diversified specialty finance company. Then, my question I guess is, what other publicly held comps in the marketplace do you think you should be compared against, as a specialty finance company?

I don't want to get too ahead of myself there. And I think that's not my area of expertise. We are trying to put a business plan in place, and I do think that's ultimately where we will end up, but for us it's about where the best opportunities are.

I could be -- I could certainly see, several years from now, if we saw the opportunity going back the other way into the mortgage space, then I could see us going back the other way. So I am going to dodge that question for now and just admit that it is not my area of expertise, in terms of what are the comps in the equity space. I think Springleaf is in the space, you could argue [CIP] -- there are so many companies that you could argue are in that space. I don't -- again, not my strength to tell you what it is. But when we get there, I will be -- we will definitely have an answer to that question. Sorry.

Okay. And, secondly, could you just remind us, how much stock do senior members of Management own in EFC, and also the Board? And how much of a -- how much has that changed in the last quarter? Thank you.

Yes, I don't think it's changed at all in the last quarter, other than the fact that some employees and directors, things like that, as part of their compensation, got some equity interest. So --

It's still at 10.5%.

So -- it's about 10.5%. That includes Management, it includes trust that we have set up for our families --

It includes the Board.

Includes the Board, but the Board is a small piece of that. I mean, it's really Ellington and our families, if you will, that represent that -- the 10.5%. And that has not changed.

Okay. Thank you.

I don't think anyone's sold a share recently. All right. Operator, looks like we're done with questions.

There are no further questions at this time. Ladies and gentlemen, this concludes Ellington Financial's first-quarter 2016 financial results conference call. Please disconnect your lines at this time, and have a wonderful day.