Ellington Financial Inc (EFC) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Ellington Financial First Quarter 2018 Earnings Conference Call. Today's call is being recorded. (Operator Instructions)

It is now my pleasure to turn the floor over to Maria Cozine, Vice President of Investor Relations. You may begin.

Thanks, Alicia, and good morning.

Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature.

As described under Item 1A of our annual report on Form 10-K filed on March 15, 2018, 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 JR Herlihy, 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 3 to follow along.

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

Thanks, Maria and welcome everyone, to our first quarter 2018 earnings call. We appreciate you taking the time to listen to the call today.

The first quarter of 2018 started out much as 2017 ended, with volatility historically low and equities continuing to reach record highs. Of course, we saw all of that change in a hurry in February, with investor concerns over inflation and rising interest rates, sparking a sharp selloff in equity markets. The S&P reached correction territory on February 8, just 9 trading days after reaching an all-time high. The VIX jumped 282% between the start of the year and early February, with its largest 1-day movement on record occurring on February 5. The 10-year Treasury broke out of its 2017 range, reaching 2.95% on February 21, its highest point in more than 4 years. Yield spreads across many Credit and Agency products widened in sympathy with the greater market volatility.

Despite these headwinds, I am pleased to report that Ellington Financial had an excellent performance for the quarter. We successfully navigated the market volatility and benefited from strong performance across both our loan and securities Credit strategies.

For the quarter, we generated net income of $0.67 per share, helping us generate an excellent total return of 4.3% or 18.3% annualized. That $0.67 in earnings, of course, comfortably covered our $0.41 dividend. And as a result, yesterday's book value per share increased 2.1% from the prior quarter even after payment of the dividend.

Just as importantly looking forward, our net investment income per share has been steadily growing recently, and it came in at $0.32 per share for the first quarter. So net investment income alone during the quarter covered about 80% of our $0.41 dividend.

As this quarter's results indicate, our patience in building a high-quality Credit portfolio is really paying off. Take a look at Slide 11. You can see the progress we have been -- we have made growing and diversifying our Credit portfolio over the past few years, particularly in our proprietary loan strategies. We believe that these loan strategies are the key to generating a steady stream of earnings supported by predictable net interest income.

As you can see back on -- sorry, as you can see back one page on Slide 10, we finished the first quarter with a Credit portfolio of approximately $1.03 billion, which was 15% higher than at year-end. You'll see a larger Credit portfolio than that on our balance sheet. But our balance sheet includes the non-QM mortgages that we securitized and have consolidated under GAAP. And for the purpose of discussing our objectives for the ultimate size of our overall Credit portfolio, I think it makes more sense to focus on the tranches we retained from the securitization as opposed to the gross asset inside the securitization.

In any case, as you can see lower down back on Slide 8, undeployed capital stood at 6% at the end of the quarter, which implies that we're actually pretty close to fully invested. However, I need to put an asterisk on that 6% undeployed figure. A portion of the Credit portfolio is still currently deployed in lower-yielding, more liquid interim investments that we plan to shift into higher-yielding investments as those continue to come in from our pipelines. So we don't expect the Credit portfolio to continue with double-digit quarterly growth rate from here. And our focus has shifted somewhat to rotating capital out of the interim investments and into the higher-yielding target assets.

To summarize, we still have some work to do reaching our desired portfolio composition, but I'm extremely pleased with where we are today.

As the Credit portfolio continues to grow, we continue to improve and diversify our sources of financing. During the quarter, we added new financing facilities for our European nonperforming loan and consumer loan strategies and closed our second Ellington-sponsored CLO. We've also been able to negotiate better terms on a number of our existing bank financing lines, as JR will mention later. As to our securitization financings, we expect to pursue additional securitizations across our non-QM and other strategies later this year, subject to market conditions.

In the securitization market, there was one very interesting development this past quarter, which should give a nice boost to our retained CLO investments, namely the U.S. Court of Appeals ruled in February that U.S. risk retention rules do not apply to managers of open-market CLOs. This ruling should increase the liquidity of some of our retained CLO investments.

As I'm sure you've noticed, our leverage has ticked up over the last few quarters as we've grown our portfolio and aggressively bought back shares. We finished the quarter with a debt-to-equity ratio of 2.63:1, up from 2.38:1 at year-end.

Now compared to our hybrid mortgage REIT peers, our leverage is still low. But it's high for us, historically speaking. However, not all leverage is created equal. A decent portion of our total borrowings now relate to the non-QM securitization deal that we consolidate; another portion relates to term non-mark-to-market bank facilities; and another portion relates to our unsecured senior notes. These forms of leverage are obviously much less vulnerable to market shocks than say, repo. So I still see some room to add leverage prudently as we continue to grow the Credit portfolio. But as the portfolio approaches its desired size and composition, I'd expect to see a leveling off in our recent trend of increasing leverage.

We'll follow the same format on the call today as we have in the past. First, our CFO, JR Herlihy, will run through our financial results. Then, our Co-CIO, Mark Tecotzky, will discuss how our markets performed last quarter, how our portfolio performed, and what our investment outlook is going forward. Finally, I will follow with closing remarks before opening the floor to questions.

And with that, I'll turn the call over to JR.

Thanks, Larry, and good morning, everyone. Please turn to Slide 24 for a summary of our income statement.

In the first quarter, EFC generated net income of $21 million or $0.67 per share, broken down as follows: net investment income after G&A and management fees of $10.2 million or $0.32 per share, plus net realized and unrealized gain of $11.1 million or $0.35 per share, minus allocation to noncontrolling interests of $285,000 or $0.01 per share. Our net income comfortably covered our dividend of $0.41 per share, while net investment income covered about 80% of it as we continue to grow the Credit portfolio.

By comparison, last quarter, we had net income of $7.4 million or $0.23 per share and net investment income, excluding the onetime issuance expenses associated with the non-QM securitization, of $8.7 million or $0.27 per share.

The increases in net income and net investment income are entirely attributable to the Credit strategy.

Please turn to Slide 6 for details on the attribution of earnings between our Credit and Agency strategies.

In the first quarter, the Credit strategy generated gross income of $25.3 million or $0.81 per share, while the Agency strategy had a slight loss of $317,000 or $0.02 per share. The $0.81 of gross income from our Credit strategy was approximately doubled that of the prior quarter. The underlying drivers of the significant increase were numerous.

First, as Larry mentions, we grew our credit holdings this quarter, which increased our net interest income. At the same time, the weighted average yield on our assets and our overall cost of funds on borrowings both increased. Pressured by the rise of LIBOR, the average cost of funds on our Agency RMBS borrowings increased by 26 basis points quarter-over-quarter. Meanwhile, we were able to renegotiate terms on several of our credit lines, and the average cost of our secured credit borrowings increased by only 3 basis points quarter-over-quarter despite the hefty rise in LIBOR.

Second, realized gains were significant this quarter, led by trading gains in our non-Agency and European nonconforming RMBS and U.S. CMBS strategies; as were unrealized gains, highlighted by continued strong performance by Longbridge Financial, one of our mortgage originator strategic investments; as well as by our European loan strategy.

Despite the quarter's market volatility, our interest rate and credit hedges did not meaningfully impact P&L. In total, net credit hedges and other activities contributed gross income of $1.2 million, but the majority of that came from our corporate credit relative value strategy.

Finally, other investment-related expenses declined because last quarter, we fully expensed the onetime issuance costs associated with the non-QM securitization, which amounted to $0.05 per share.

Among our loan strategies, we had quarter-over-quarter increases in gross income from our consumer loan, performing leveraged loan and European and U.S. nonperforming loan strategies. We also had a strong quarter in our small-balance commercial mortgage loan portfolio and our non-QM portfolio, although both strategies were less profitable than they were in the fourth quarter.

We had a modest decline in quarter-over-quarter income from our European CLO strategy.

Overall, the Credit strategy utilized about 79% of EFC's allocated equity at quarter-end and generated an annualized gross ROE of approximately 23% based on its contribution of $25.3 million of P&L in the first quarter. This gross return includes financing costs, hedging costs and servicing fees and other investment expenses related to portfolio assets but excludes general operating expenses and management fees.

As of March 31, 2018, our Credit portfolio was approximately $1.03 billion, which was a 15% increase compared to year-end. As Larry mentions, this total backs out the effects of consolidating the non-QM securitization trusts.

We added assets in the following strategies: residential mortgage loans and REO, European nonconforming RMBS and consumer loans and ABS.

In addition, we increased our holdings of certain more liquid, lower-risk assets such as U.S. non-Agency RMBS and CLO note investments. We believe that these investments can be sold easily as we continue to add higher-yielding assets. And in the meantime, they provide the opportunity for solid net income.

Portfolios that declined in size during the quarter included European CLOs and U.S. CMBS.

Gross income in the first quarter from our Agency RMBS strategy was similar to the prior quarter, with a loss of $317,000 or $0.02 per share as compared to a loss of $58,000 or $0.00 per share rounded for the fourth quarter.

During the first quarter, Agency RMBS prices dropped and yield spreads widened, which led to realized and unrealized losses on our Agency portfolio. However, these losses were mostly offset by the net interest income from the portfolio and from gains on our interest rate hedges.

As of March 31, 2018, we had long Agency RMBS holdings of $928 million, up from $872 million at year-end as we were able to capitalize on the widening of Agency RMBS yield spreads by adding to the portfolio. The close to break-even performance in our Agency strategy was all the more remarkable given that the Bloomberg Barclays U.S. MBS Agency Fixed Rate Index recorded a negative return of 1.19% for the quarter, and that's on an unleveraged basis. If you compare the performance of our Agency strategy on an ROE basis to the performance of the Agency mortgage rates over the quarter, you can also appreciate that we did a great job preserving capital in our Agency strategy.

As of March 31, 2018, we had a debt-to-equity ratio of 2.63:1, which, as Larry discussed, is a significant increase over the previous quarter-end when that ratio was 2.38:1. The higher leverage resulted from increased Credit and Agency borrowings in connection with new purchases, along with the reduced capital base due to share repurchases. Leverage also continued to be higher because we consolidate the non-QM securitization for GAAP reporting purposes. If we weren't consolidating the non-QM securitization-related debt, our debt-to-equity ratio would have been 2.44:1.

During the first quarter, we repurchased 943,897 shares or approximately 3% of our outstanding shares coming into the quarter, on average at a 22% discount to diluted book value per share. As a result of these discounts, our share repurchases were accretive to diluted book value per share by $0.13.

For the first quarter, our general operating expenses were $4.05 million, representing an annualized expense ratio of 2.7%, which decreased slightly from 2.8% in the prior quarter primarily from a decline in professional fees.

We ended the quarter with diluted book value per share of $19.25.

I will now turn the presentation over to Mark.

Thanks, JR.

Throughout its history, EFC has always tried to position itself to deliver investors what we call a quality return. That means an investment return that doesn't rely on crossing our fingers and hoping that interest rates stay low and the yield curve stays steep. A quality return doesn't rely on the greater fool theory that credit spreads will always tighten because we will always be able to find somebody willing to pay just a little more than ourselves.

Our philosophy means that we focus on value. That includes finding fundamentally high-yielding investments or finding fundamental relative value between our longs and our shorts. Over cycles, it has worked well. But over quarters, we may lag or outperform our peer group. We hold less outright credit exposure and less levered beta than many of our peers. So when credit spreads in a given quarter go from tight to tighter, as happened in the second half of last year, we may not be the top performer.

But in a quarter like this past quarter, we are proud to have delivered to our shareholders not only an excellent 18% annualized return but even a much stronger relative performance versus our peer group.

So what worked this quarter? Larry and JR pointed out the highlights. For EFC, it was more evolution than revolution. Take Longbridge Financial, which is one of our strategic mortgage originator investments. Longbridge originates loans that get sold to Ginnie Mae reverse mortgage pools. And this quarter, Longbridge made a significant contribution to our earnings. Since our initial investment in Longbridge in 2014, our PMs and research team have been working with Longbridge management, helping to build the company, driven by the thesis that as baby boomers age, reverse mortgage demand would increase, and without big bank participation, the competitive landscape looked favorable. All that hard work is paying off now because private equity investments like that take a long time to bear fruit. We believe that Longbridge is building a business that will not only generate returns for EFC but may also manufacture proprietary, high-yielding assets for EFC.

At EFC, we're not interested in just putting on a levered credit beta trade at this point in the credit cycle. Of course, for much of the last 2 years, the levered beta trade worked as QE had put more cash in the system than there were interest in bonds to buy. In quarters where purely technical factors drove the price of commoditized credit assets like credit risk transfer securities, our capital invested in Longbridge lagged because the short-term opportunity cost was high. Now with Fed balance sheet reduction and continued rate hikes and wider IG and high-yield spreads, portfolios built on levered credit beta or lots of interest rate risk are finding it challenging to generate returns.

As we've grown our Credit portfolio at Ellington Financial, we have focused much more on diversified fundamental value, not on the greater fool style of trading. We have what we believe are balanced risks, commercial versus residential, consumer debt and CLOs, U.S. and European exposure. This made our balance sheet more complicated, but we don't have all our eggs in one basket, and we are less impacted by big up-and-down moves in the stock market. When a rising tide lifts all boats, we won't necessarily be the Queen Mary. But now we are seeing the tide shift to a very favorable market for us, and one that enables really high-yielding, proprietary assets with great financing terms to outperform more commoditized strategies. We are benefiting from strong performance from our loan strategies and seeing contributions from our strategic investments in mortgage originators, as I mentioned, and continue to take advantage of favorable opportunities to securitize.

Another tailwind this quarter was that we bought back another 3% of our shares. We think we have a great strategy at EFC, and our job is not only to deliver returns but to effectively communicate our strategy to the market. When our stock price is at a significant discount, it means investing isn't through or isn't well received. At those times, we believe that we should do accretive buybacks to drive returns and accept a slightly smaller equity base. A smaller equity base is not a good thing in and of itself, and this quarter -- but this quarter, buybacks were in the best interest of shareholders.

From my perspective, I'm really happy to see the continued increase in our net interest income, especially from such a diverse set of high-yielding strategies. That is what gives stability to our ability to earn our dividend.

Quarter-to-quarter, our results will always be significantly impacted by mark-to-market moves. But over longer period of time -- longer periods of time, fundamental value and steady yield generation dominates. It's a classic example of the Benjamin Graham quote, "In the short run, the market is the voting machine. But in the long run, it is the weighing machine." We have -- we always have more work to do, and our focus continues to be on acquiring high-yielding, short-duration assets, often with some barriers to entry, so returns cannot be eroded by the entry of other investors.

Looking ahead, we think the Fed balance sheet reduction may continue to be a headwind for both rates and the commoditized credit sectors. The tax reform that boosted the outlook for both growth and inflation, which brought market volatility, is a big fundamental positive for much of our portfolio as borrowers in our legacy MBS and in our consumer loan portfolio generally benefit from the policy changes.

We have seen strong underlying credit performance across our portfolio, and our primary focus is on increasing the yield of our portfolio and leveraging that yield in the most advantageous way using both securitizations and term financing arrangements.

Now back to Larry.

Thanks, Mark.

2018 is off to a great start, and we look forward to building on the first quarter's performance. As you can see from the estimated book value per share that we announced last night, the second quarter is also off to a great start, with April up another 1.7%, non-annualized.

Our Credit portfolio continues to grow as we capitalize on the robust pipeline of high-yielding loan assets that we have developed. And as a direct result of this growth, our net investment income is also growing nicely.

At the same time, with volatility picking up, we are seeing opportunities to add assets with higher yields as well as trade more liquid parts of our portfolio. Of course, the jarring event -- effects of this volatility are virtually all corners of the market have also underscored the importance of our interest rate and credit hedges to protect and preserve book value. As you can see on Slide 21, EFC is unmatched among its peer group in the stability of its book value.

Besides the high-yielding profile of many of our credit assets, it's also really worth highlighting their short duration. Turn to Slide 9 to see our interest rate sensitivity analysis. The fourth line down, non-Agency RMBS, CMBS, other ABS and mortgage loans, captures the vast majority of our long Credit portfolio.

As you can see in the table, if rates shift up or down by 50 basis points, we estimate that the impact from the Credit portfolio on our overall book value would be about plus or minus 60 basis points. That translates to a duration of about a 1 1/4 years, and that's before our interest rate hedges. We've accumulated such a short-duration portfolio by focusing on products like short-term consumer installment loans, 1- to 2-year commercial real estate bridge loans and nonperforming loans where we prioritize fast resolutions. Importantly, looking across the entire portfolio, including interest rate hedges, you can see how our portfolio should perform in a rising rate environment. In a scenario where rates rise 0.5 percentage point, we estimate that our overall book value would decline by about 1/2 of 1%, which is a tiny number. And again, much less than you've seen in the performance on many of our peers in rising interest rate environments.

But there's another important reason why we've intentionally gravitated towards so many shorter-duration assets. We've been in a bull market credit cycle for years now. We don't know when that cycle will start to turn. But whenever it does start to turn, I think we'll be very happy to see our short-duration assets continue to run off naturally and quickly, enabling us to reinvest in whatever the best opportunities are at that time.

Here's how I believe that it all comes together. The short duration of most of our portfolio, the higher current income of our portfolio, combined with our dynamic hedging strategies, liquidity management and diverse sources of financing, should enable us to both sustain performance in the current environment, whether interest rates continue to rise or not, and weather periods of credit volatility.

On the capital management side, with our share price trading at a significant discount to book value, we repurchased shares aggressively for the second consecutive quarter. We bought back $14 million worth of our stock during the first quarter or 3% of our outstanding shares, which was accretive to diluted book value by $0.13 per share. And since quarter-end, we have repurchased an additional $3 million worth of our shares through May 3.

Although we love the assets coming out of our loan pipelines, stock buybacks are a compelling use of capital while we remain at such a discount to book value. I still can't believe how cheap our stock is, but until the market starts to appreciate what we now have going for us, well, we'll try to be opportunistic and take advantage of that as well.

Before opening up to Q&A, I'd like to point out that on the presentation section of our website, right next to the quarterly earnings call presentation, we also posted a one-page overview of some expected pros and cons of a potential C corp conversion for EFC.

As we discussed last call, we're actively evaluating the potential actions we may take in response to the passage of the Tax Cuts and Jobs Act, including possible changes to our investment strategies and even to our structure as a publicly traded partnership.

I can't emphasize enough that at this point, we are still just evaluating options and monitoring market developments, one interesting development being another high-profile conversion of a PTP to a C corp just last week. But in the meantime, we wanted to provide investors with the list of some of the considerations of a potential change to a C corp.

We continue to evaluate all possibilities, which not only includes a potential conversion to a C corp but also possible conversion to a REIT. Becoming a REIT could also bring with it big benefits such as lower effective tax rates on our income for U.S. taxpayers, simplification of the tax reporting process and expansion of our investor base. However, at the same time, becoming a REIT would limit our capacity to invest on our non-mortgage, non-real estate assets like consumer loans and CLOs and also limit our ability to hedge credit risk.

As always, investor feedback on these issues is welcome.

And this concludes our prepared remarks, and we're now pleased to take your questions. Operator?

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

Can you talk about the -- either the yield or the ROE pickup that you see as you rotate assets into the longer-term targeted credit assets?

Sure. Just give us a second here. We're going to see if we can find some numbers. We might not have it broken out quite that way.

Yes, yes. Okay.

Go over that with Doug.

So yes. So the -- I can speak to the performance of the credit assets in general versus the placeholders in the first quarter. So the ROE on the placeholders in Q1 was about 7.5%, and that includes net debt levered carry versus the overall Credit portfolio was, as we mentioned, into 20s annualized. So there's quite a bit of delta at least that we saw in Q1.

Yes, then the yields are obviously lower than that in 7% and change. Well, so that's levered, exactly. So yes. But -- and those -- we -- sometimes referred to it as the placeholder assets or the interim assets. Are -- so obviously, they're lower yielding. We're buying these not just for their yield. I would say mostly, it's for their yield. But in many cases, we also think that they're good short-term total return plays as well. Sometimes, you've got securities which are rolling down the curve quickly, so we think that their credit spread is going to tighten just based on roll-down analysis. And they are liquid. So when -- as those higher-yielding assets are coming in -- and if you look on Slide 8, you can see where the higher-yielding assets, the loan assets especially, what kind of yields we're projecting on those. And you can see that it's obvious, a substantial pickup.

And as far as kind of the pacing of those kind of long-term assets, I guess, would you expect a sort of a comparable pace? Do you think you're kind of at a run rate now? Or do you think there's room for acceleration in the pace that you can add those assets?

Yes, I don't know if I would necessarily say acceleration, but I think we should be able to keep the pace up, again not in terms necessarily growing the overall size but in terms of adding more of those long-term, high-yielding especially loan-related assets. So yes, I think we're not where we ultimately want to be yet, but we're close. So -- and I think, at least for the next quarter, I would expect more of the same.

And then last one for me. If you could just remind me what you have remaining on your share repurchase authorization.

Yes. As of -- through May 3, it's about 820,000 shares of the 1.55 million.

And just on that, we try not to emphasize too much the amount that we have left in the authorization only because our board has been very receptive to reauthorizing whenever we have run out of shares in the program and just have -- so the board has made the determination that it makes more sense to authorize, I should say, more frequently and with smaller amounts than to just authorize some incredibly large amount and leave it hanging out there forever. So it's a -- that's just the way that we've preferred to do it.

Your next question comes from the line of Crispin Love with Sandler O'Neill.

So as you said that, book value growth was really strong in April. Can you talk a little bit about what you're seeing in the second quarter and kind of what's driving that strength? Is it a continuation of the first quarter with the strong credit -- trading gains? And then kind of are there other factors that play there such as benefit from net investment income and then also a benefit from share repurchases?

Yes. So part of it is share repurchases. So we purchased another 200,000 shares following Q1. It's also a small sample size, so it's just a month, but I think a continuation of many of the same things. I mean, we just published the estimate of the overall change. We haven't broken down yet the components. But I think it's -- we're encouraged. It's a continuation of income coming from many of these loan strategies that we've been building over the last few years, yes. And definitely don't want to extrapolate that out, right, in terms of it's not coming from purely net interest income just like in the first quarter. We've just had some good headwinds in terms of some of our more liquid investments finally bearing fruit. We mentioned the Longbridge investment on the call. We've had some NPLs that have been performing quite nicely and are now looking much more valuable than they were before. So you've -- it's a combination of factors, and I wouldn't want to give anyone the impression that, that was repeatable indefinitely. But what we're trying to do is we're trying to build a portfolio where net interest income can cover the dividend, right. That's the key. And we obviously well more than covered a -- the accrued dividend, let's call it, during April given a 1.7% or 1.8%, whatever it was, annualized -- sorry, a non-annualized return from that.

Okay. And then I guess just a little bit more detail on the Credit portfolio. Do you expect that to be fully ramped in -- maybe not kind of by mid-2018, but do you think there might be a few more quarters out but maybe just not quite the same growth that we've been seeing in the last few quarters?

Yes, I think we're getting there. I mean, whether -- I'd say a few more quarters. That might be actually even a little too long in terms of what our expectation is. I mean, we're sort of attacking the issue on 2 fronts, right. Number one, we're growing the portfolio. Number two, hey, our stock price is cheap, and we're buying back stock. And so that actually is also helping us get to the finish line. So I think we're pretty close. I think we're, at most -- I mean, if you consider where we are at the end of the first quarter, am I going to say that I think we'll be there at the end of the second quarter? No, not necessarily. But the end of third quarter, I'm feeling pretty good about that. So maybe sometime in between. We'll see.

And I guess when you get to that point, will growth be kind of in the low single digits span or kind of mid-single digits? Or kind of we should be more stable kind of a steady state...

Yes. When we get to where we want to be, I think it'll be more steady state. There we'll be talking more about rotation, right, because your -- when you have a certain capital base, that can only support prudently a certain asset composition. So I think that from there, we have lots of different strategies, right, which is great. I mean, it makes us -- it's not -- we're not a pure play in any one sector and we don't pretend to be. But I think in this environment, that's really where we want to be. So as we see different relative value in different sectors, I mean, non-QM, right, there's a market where the prospects are evolving there. You've got securitization spreads are changing, the competition to originate is changing. So we'll look at -- we're always reevaluating, hey, is that where we want to put our incremental capital dollars at this point? Consumer loans, what's going on there? What's going on with our flow providers? Do we have new flow providers? So we want to be able to shift the allocation and rotate into these strategies depending upon -- and out of these strategies depending on where we see the best value. And that's the other great advantage of having that shorter-duration portfolio, especially in so many big chunks of our portfolio, where if we don't -- if we think that one sector is not placed to be -- and the other one is, well, we can sort of naturally get there without having to painfully pull some band-aid off without selling some 10-year illiquid asset at a huge discount. We can just wait for the cash flows to come in.

Yes, this is Mark. I want to add one thing. So even when you're at steady state, there's still a lot of activity in the portfolio if you think about non-QM, if you're originating high-yielding, non-QM loans, you're financing with repo. Then when you do a securitization, you're essentially concentrating most of the yield in that securitization into the pieces you retain. So you add this very high-yielding retained portion to the EFC portfolio, and then you free up capital in the proceeds you get from the securitization. And then you're looking to deploy that capital in other high-yielding assets. So steady state doesn't mean the portfolio doesn't evolve, right. The portfolio is constantly trying to generate additional yield and have those pieces you retain, say, from a securitization, have their yield drive and support your dividend.

And the non-QM, just to -- I want to add one more point on our non-QM strategies. So the origination flow there has been slower than we had hoped originally when we got into the business. We -- I mean, the performance has been pristine. I think we -- I'm not sure if we mentioned this on the last call or not, but we had -- I think it was 99.7% in terms of...

Perfect pay.

Perfect pay.

Perfect pay. I mean, it was perfect pay on these loans. So way above the rest of the group. And I think our next securitization -- our first securitization, we got great credit from the rating agency for that. I think it'll be even better on our next one should that happen. But, well, the point I wanted to make was that our time in between securitizations, we're really hoping for that to shorten a lot. We securitize -- what was the number?

$140 million.

$140 million of assets, and we ended up retaining, what was it, $8-odd million of...

$7 million.

$7-odd -- yes, $7 million of tranches. So as Mark said, you're really concentrated. And those are obviously very high yielding, right, those retained tranches, to all of our projections. But what we want to do is we want to really increase the frequency of that so that the loans are not on our balance sheet for as long as loans where they're not as high yielding, right. I mean, we have a net interest margin versus our financing lines there, but that's not as effective in terms of generating a leveraged return on equity as actually doing the securitization. So we're hoping that the origination flow will continue to increase. And if we can get that -- I think recently, it's been in the low $20 millions per month. If that can get up to $40 million a month, and so doing a, let's say, $160 million securitization, we can do them 4 months apart, right, that's just a lot better in terms of also use of our capital. So all these things, we'll just have to see how they play out.

Your next question comes from the line of Mikhail Goberman with JMP securities.

A few of them have been answered already, but I guess maybe talking about the buyback again. You did -- you guys did 3% in the first quarter. Is that a sort of a pace that we can expect the rest of the year, assuming all else being equal?

So yes, I wouldn't say that I hate to sort of put us on the line like that. We -- given where our stock price is, it's -- I don't know where it is as we speak, but it's still -- before we came in today, we're still slightly below 80% of book . And we've been pretty consistent saying that as long as we're there, we should buy back aggressively. Now -- and I think we've shown for the last couple of quarters that we put our money where our mouth is. On the other hand, if we -- as we trade above 80% and further above 80%, we've also been, I think, quite clear that we don't think, given all the other opportunities we're seeing on the asset side, that that's the best use of our capital. So for example, we've said before that by 85% of book, we're probably not repurchasing anything. And in between, well, we want to leave us some flexibility there. So I wouldn't -- it's going to be very stock price dependent. We're going to be very optimistic about it. We're not -- it's not like we are buying at the same pace at different prices. The pace that we purchase is going to be a function of price, and whether we purchase is going to be a function of price. So the one additional point I wanted to make as well was that we are constrained by the volume -- the daily trading volume of our stock and -- which is lower than a lot of the peers in the space. So we tend to trade -- a lot of the peers in the space could trade 0.75%, 1% of their shares, outstanding shares, per day and we're trading quite a bit less than that. So if you could think about the 10b-18 volume restrictions, which are both a percentage of volume based and time based during the day, we're -- so that actually ends up being a significant constraint as well even when we've got the pedal to the metal and are buying, for example, when you've been significantly below 80%. So I would say that all things being equal, that's probably a, I'll call it, a soft ceiling because we were pretty much in that aggressive buying mode all quarter. And if our stock price goes up, then I could say it could obviously be significantly lower than that.

Got you. And I guess just a quick one on how you guys are thinking about your hedge portfolio going forward with your short TBA strategy and, I guess, a duration gap of about 0.6 now. Some continuity there? Or any -- I guess how you guys are thinking about it going forward.

Yes, this is Mark. I mean, despite the roughly 50 basis point increase in interest rates since the start of the year, we don't then change our duration gap exposure on the Agency side in response to that. We sort of take the view that we don't -- interest rates are difficult to predict. And if we want to generate consistent total returns for the shareholders, we're best not to expose a lot of book value risk to get in the direction of interest rates. So we don't do that. So that's the main thing. I mean, we certainly see more attractive net interest margins now in the Agency market than what we did at the start of the year. That might argue for a slight increase with our net mortgage exposure. But what you'll see in terms of our hedging is we can dial up and down different instruments we choose to use: swaps versus treasuries versus TBA mortgages. So the under performance of Agency mortgages broadly in the first quarter, maybe it argues for a little bit of a smaller TBA hedge and a little bit of more swap or treasury hedge. So that's probably the more likely change you could see us make.

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

Can you talk about the competitive landscape across your Credit portfolio and just kind of which assets you're seeing the most competition for and pressure from a yield perspective?

Sure. This is Mark. So on the commercial side, CMBS, for years, I think in financials, it's light B-piece investments. With risk retention, you've seen a smaller number of CMBS yields come to market that have a structure that is favorable for us. So I think there, we remain active, but that's an area where I think that some of the changes in our risk retention rules have slowed down the deal supply. But on the other hand, in the small-balance commercial loans, there's been a consistent supply there. Consumer loans, it's been pretty much steady as she goes. We haven't noticed a big increase in competitive pressure, so I think our expected return in that portfolio is roughly consistent versus where it was a year ago. Larry talked about non-QM. There, I think that product has become more of a -- more popular among both originators and borrowers. So we have felt some competitive pressures there in terms of what interest rate we offer to borrowers relative to where interest rates are in the short part of the yield curve. So that area, I think there has been some competitive pressures. Non-Agency RMBS, that's been pretty consistent. There hasn't a big change there. So we haven't felt that competitive pressures have eroded our returns. I think -- in large part, because a lot of what we -- a lot of the work we've done in Ellington Financial over the last 2 years is really to diversify the asset base and get into a lot of assets, that other people can't commoditize the yields away because there's some barrier to entry. So I think that's sort of like you can put a moat around the business, but we've -- there's a moat around the yields in a lot of what we're buying, which is helpful in paying -- in the dividend-paying ability of the portfolio.

Okay, got it. That's very helpful. And then I know you guys are very disciplined on credit. But can you just talk about kind of brother credit performance and if you're seeing any type of loosening in standards more broadly across either consumer or CRE?

Yes, so I would say it's broadly like the highest level. The big trend you've seen this year is the underperformance of investment-grade credit spreads and high-yield spreads versus state treasuries, right. And that's so that's a pretty stark reversal from the environment we've been in post first quarter 2016. In terms of CRE, I think we control our own destiny there with the B-pieces. So we've kept our standards consistent with where they've been in the past. And if other investors want to loosen their standards, that's not something we've wanted to do. Look, we recognize commercial real estate values have done very well in this cycle, right. Cap rates have come down. So there, I think we've been able to keep our discipline the same. On the consumers loan side, again, we're not buying from entities that we don't have a relationship with, where we have ongoing discussions about underwriting credit quality. So broad trends might be for a slight loosening of credit, but our portfolio has not been impacted by those broader trends. It's impacted much more by the ongoing dialogue we have with our partners.

And I just want to add a couple of things. In B-pieces, for example, on CMBS, we actually -- some of the gains that we had -- the realized gains that we had in the first quarter were actually from sales of B-pieces. So as that market tightens, right, that's an opportunity. We thought that the value wasn't there anymore, so we actually sold a bunch of pieces and recognized the gains there. And I think Mark is just right, we were actually able recently to close yet -- or not, but we were actually recently able to replace some of that. So we've still been a net seller in recent times. Don't get me wrong, but we were actually able to pick up a new B-piece that we thought was at very attractive levels. So we're going to continue to be optimistic that way. And if B-pieces start tightening a lot like they were at one point in the first quarter, we'll lighten up there. And if we get an opportunity to replace assets that we always think is, again, at very attractive yields, we'll do that. So yes, any other questions?

No, that's it for me. Appreciate the color.

Great. And I think I just wanted to -- I've been doing a little research as we've been talking in terms of one of the questions before. I think it from Doug...

From Doug, yes.

About the interim assets versus the higher-yielding assets. Go ahead, JR.

Right, Doug. So the -- so looking at market yields on interim investments versus our target Credit assets, there's a range of the interim investments. It's around 5% or 6% versus a range of maybe 8% to 8.5%, on other target Credit assets. So unlevered, you're looking at about a 250 basis point pickup. And then again, this may be post leverage a little bit more than that.

Great. All right. Well, thanks, everyone. Operator, I think we're done.

This concludes today's call. You may now disconnect.