Ellington Financial LLC (NYSE:EFC)
Q2 2014 Earnings Conference Call
August 7, 2014 10:00 AM ET
Larry Penn - CEO of
Mark Tecotzky - Co-CIO
Lisa Mumford - CFO
Steve Delaney - JMP Securities
Jim Young - West Family Investments
Mike Widner - KBW
Good morning ladies and gentlemen, thank you for standing by and welcome to the Ellington Financials Second Quarter 2014 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 over to Lindsey Tragler (Ph), Vice President of Investor Relations at Ellington Financial. You may begin.
Unidentified Company Representative
Thank you, 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 Litigation Reform Act of 1995.
Forward-looking statements are not historical in nature and can be identified by words such as believe, expect, anticipate, estimate, project, plan, continue, should, would, could, goal, objective, will, may, seek or other similar expressions or their negative forms or by reference to strategies plans or intentions.
As described under item 1A of our annual report on Form 10-K filed on March 14, 2014, forward-looking statements are subject to a variety of risks and uncertainties that could cause the company’s actual results to differ from its believes, expectations, estimates and projections.
Consequently, you should 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.
Okay. Now, I have with me today on the call, Larry Penn, our 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.
Once again, it’s our pleasure to speak with our shareholders this morning as we release our second quarter results. As always, we appreciate you taking the time to participate on the call today.
First, a few highlights. It was another strong quarter for Ellington Financial. Our net income was $0.81 per share and the return on equity for quarter was a solid 3.4% or over 14% annualized.
Again, we were solidly profitable in our non-agency and agency strategies. We declared our seventh consecutive regular dividend at the $0.77 level and we increased book value even after payment of our dividend.
Many of the market themes of the first quarter repeated themselves in the second quarter. But of course we did not just sit idly by. We continue to position ourselves for where we see the next opportunities developing. As these new opportunities develop, we continue to be patient and disciplined on the investment side, maintaining a lot’s of dry powder and as always, we remain disciplined about hedging.
As you can see from our results, this quarter and last and from the evolving composition of our portfolio and our evolving sources of income, we have been able to continue to generate excellent profitability even while we have been setting the stage for growth in a number of exciting new areas. I will elaborate on our diversification efforts 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 openings the floor to questions.
As a remainder, we have posted a second quarter earnings conference call presentation to our website www.ellingtonfinancial.com. You can find it in three different places; the Homepage of the website, before our Shareholders page or the Presentations page. 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 on.
I’m going to turn it over to Lisa now.
Thank you Larry and good morning everyone. As shown on our earnings attribution table on page four of the presentation, our second quarter net income was $20.9 million or $0.81 per share. The decline from the first quarter with our net income was $22.6 million or $0.88 per share was attributable to a relatively smaller contribution from our non-agency strategy compared to last quarter, our non-agency earnings were lower but our agency earnings increased. Our expenses, which include base management fees and operating expenses, were essentially flat quarter-over-quarter and we had no incentive fee expense in either period.
Our non-agency strategy produced gross income of $20.3 million as compared to $23.1 million last quarter. The strong performance of our legacy RMBS investment was once again augmented by contributions from some of the other sectors in which we recently become more active.
During the quarter, our European non-dollar denominated RMBS or CMBS, our distressed small balance commercial loans and our residential non-performing and sub-performing loans were all especially notable contributors. If we think of our gross income as consistent with interest income net realized gains in change and unrealized gains and losses in these four areas generated approximately $10 million of our $28.3 million in total gross revenues for quarter. Of course the contributions from any of these sectors can vary from quarter-to-quarter but thus far we have been very pleased with the success of our diversification efforts.
The $2.8 million quarter-over-quarter decline in our non-agency gross income was principally driven by two things. First, we had losses on our credit hedges, which are largely in the form of short credit to full swap positions on high yield corporate industries. High yield corporate credit spreads tightening during the quarter thereby creating losses on our short position. But we believe these instruments provide an effect hedge for a non-agency holdings over the longer term. Second, in the second quarter the contributions of our equity trading strategies was lower. In our equity strategies, we hold long and/or short positions in equities or equity swaps. In the first quarter, they had performed exceptionally well generating growth income of $2.8 million. In the current quarter, our results moderated here received equity strategies generating approximately $300,000.
Third quarter returns over approximately 18% of the non-agency portfolio as measured by sales excluding pay down. We monetized gains in the amount of $4.9 million or $0.50 per share. While turnover rates will definitely fluctuate from quarter-to-quarter, active trading is always a key element of our strategy. As a result of lower purchase yields, our overall weighted average yield based on amortized cost dropped to 9.08% in the second quarter down from 9.24% in the first quarter. At the end of the second quarter, our long non-agency portfolio was $670 million up a little from $661 million last quarter. On page 11 of the presentation, you can see the portfolio breakdown by sector.
In our agency strategy, our second quarter gross income was $5.2 million or $0.20 per share up from the first quarter when we earned $4.1 million of fixed income per share. Our agency strategy utilizes less than 20% of our capital that contributes meaningfully to our results. Our interest income was relatively flat quarter-over-quarter and we turned over approximately 21% at the agency portfolio. Thereby monetizing net realized gains of about $2 million or $0.08 per share.
Notwithstanding some of the ongoing pressure by the potential client in the willingness of banks provided repo financing, we’ve continued to fund financing readily available. Our costs for both non-agency and agency repo have declined and we are active with our longstanding counterparties as well as with some new counterparties. Our weighted average repo borrowing cost fell quarter-over-quarter to 0.35% from 0.36% on our agency borrowings and to 1.89% from 1.9% on our agency borrowings.
In addition, we’re putting on more of our non-agency repo for a six months term so the weighted average remaining days maturity increased quarter-over-quarter by 18 days to 100 days. Importantly, we continued to utilize low leverage in execution of our strategies.
As Larry mentioned on Tuesday, our Board declared a second quarter dividend of $0.77 per share. And based on yesterday’s closing price of $22.95, our annualized dividend yield equate to 12.9%.
I will now turn the presentation over to Mark.
Thanks Lisa. In addition to talking about the mortgage market in the second quarter and how we manage the portfolio, I will also discuss what we are seeing so far in the third quarter given that we are over a month into it. The third quarter so far is shaping up very differently than the second. We took some portfolio actions in the second quarter to help protect exactly the kind of moves we are seeing right now in the market. It just seems to us the market gotten very complacent about risk in the second quarter. So we were able to buy lot of cheap protection. In the non-agency portfolio while the market didn’t present us with commended entry points to net add a lot of investments, it does present us with lots of opportunities to both upgrade and diversify our portfolio.
As Lisa mentioned, we continue to actively turn the portfolio over. Some of that activity was adding more better quality all day but we continue to seem material improvements in borrower default rate largely in response to better overall economic conditions and continued home price appreciation. We chose to exit some newer vintage subprime pools where we have grown increasingly concerned that the long liquidation timelines in certain regions will make it adversely impossible for the delinquent housing stock into vintages to participate at all in the overall home price appreciation. We also took advantage of developing CMBS price to exit some of our positions at attractive levels and chose to mere that largely in seasoned CLO that looks particularly attractive relative to our high yield hedges.
Many of the market trends that were in place in the first quarter carried into the second quarter. Interest rates declined credit assets were well bid volatility was low and many different types of investors were actively putting cash to work. We almost universally held view that interest rates would rise this year was called in the question in the first quarter and soundly rejected by the end of the second quarter. In fact many market participants are now calling for further declines in the yield. Bond funds got major inflows rate forecasters begin to call for further rally and credit spreads particularly in the high yield market rally to all-time highs.
Much of what we have accomplished in the quarter in addition to generating the strong returns we posted was to position our portfolio to protect itself to the two powerful forces of gradually declining interest rates and gradually tightening credit spread suddenly reversed. When shocks occur in the market prices can move vibrantly and suddenly and protecting portfolios in the midst of a shock is much more expensive than protecting them before the shock occurs. The second quarter had no shocks it was a wonderful quarter for bonds. Price went up and spreads tightened.
Interest rate hedges and credit hedges we had in place weren’t meeting the quarter but they were very cheap insurance. We added to our corporate hedges in the second quarter as you can see on slide 13.
Since the end of the second quarter, we have seen these trends reverse. High-yield bonds are down a few points. CMBS spreads have widened, and Fannie Mae and Freddie Mac risk transfer bonds are as much as a 150 basis points wider with some chances down over 7 points. Our hedges right now are doing their jobs and as we’ve seen before, they are allowing us to act aggressively while others are being decent. We could not have predicted that we would get shot to corporate credit prices but given the level of complacency in the market in the second quarter and the cheapest reinsurance it just made a lot more sense for us to having hedges in place than not.
As Lisa mentioned our efforts to diversify our revenue streams continue to benefit shareholders. These days we are casting much wider nets than we used in our suite of assets to drive returns and this has been really critical given the amount of liquidity the Fed has injected in this system. By looking at more markets in the U.S. and Europe to find opportunities, we have been able to maintain high current yields without having to add additional leverage or have to go down in the capital structure when we weren’t getting paid enough for it.
When we think about the hedges we have in place and cost of hedges, we are always debating as to how many we need, how to keep the costs down, how to use them as a source trading. One thing that we keep in mind is that these markets can move quickly and sometimes the catalyst is hard to see. So credit hedges didn’t do much for us in the second quarter, they have been very valuable post quarter end. We’ve also seen interest rate volatility to pick up since quarter ended well. Our view is that as the Fed takes fewer treasury bonds out of the market, it may decrease capital available for risk assets, which could obviously come under pressure especially if interest rate levels become more volatile.
Our view by the end of the second quarter was at the high yield credit market had reached precarious levels. If the economy were to weaken, the loss adjusted yields of high yield bonds would have to increase if market expectations for defaults would increase in the very low level.
Conversely, if the economy were to improve, first interest rates would increase then bond funds with face redemption then bond funds with the pressure high yields gets wider. This quarter end you’ve seen exactly this even without a large spike interest rates wider high yield credit spreads and big outflows from high yield ETFs.
We don’t see similar kind of credit bubbles in the non-agency mortgage markets. Those quarter end the non-agency mortgage market has absorbed two multi-billion dollar O&M option from Blackrock Solutions without any weakening in prices. We see some of the differences versus high yield to radically different market technical.
The non-agency market is shrinking it’s invested on less and less of overtimes to pay it down and investors who want to maintain their current portfolio investments, need to buy more every month. Another factor that the non-agency mortgage market is backed by real assets, namely houses, so there is a strong correlation in home prices and portions of the CPI index. So, we have constantly constructed a deeply discounted portfolio so further improvements in home prices should lead to higher prices on our bonds. That offers the protection of rising interest rates are precipitated by inflation fears. While non-agency MBS aren’t immune to all shocks of the credit market, they stand on much a let’s move to our agency strategy.
Our agency strategy performed well during the second quarter, performance was supported by four strong factors; low interest rate volatility in generally declining interest rates, low levels of prepayments despite a 25 basis points decline in mortgage rates, low levels of products of Agency mortgages, and continued but gradually declining support from the Fed. Despite the low levels of prepayments realized in the quarter the two most recent prepayment reports showed us some surprising increase in speeds and some of newer production cohorts.
Payments for higher coupon prepayment protection did increase in the quarter. And post quarter end, we have continued to see prepayment protection increase in value. Our view on this is similar to our view on credit hedges. When you have risk and [indiscernible] both prepayment credit risk and insurances bearing expenses whether in the form of prepayment protection provided by specified pools or high yield hedges for credit risk for credit risk protection it makes sense to have that protection in place.
Since early July, the fact that net purchases by the Fed have got to less than a half of what they were at the start of the year is clearly weighing on the TBA market. Roll is going drive our cycle of visibly weaker than it was at the start of second quarter. The week six in the rolls hurt TBA mortgages, which we are short and helps specified pools which we are long.
As dealer balance sheet continues to contract and dealer risk appetite continues to weaken we find the market presenting us with worst liquidity but better trading opportunities. Paradoxically, as time passes and we are getting close and close to sales first rate increases, the market seems less and less concerned about it. Both actual and realize volatility at low levels, we believe our hedging strategy will position us well to take advantage of any pricing dislocations that should occur if the market addressed some unforeseen news flows.
With that I would like to turn the call back over to Larry.
As I mentioned earlier I would like to elaborate on our diversification efforts. But before I do so, I wanted to follow up briefly on marks discussion earlier about credit hedges and high yields. This is a great example of our discipline and our patience on the investment side. We’re getting well out of these hedges just because they moved against us earlier this year. And our discipline and patience paid off in July when corporate credit spreads finally cracked. Our thesis which we believe still holds. Not only is non-agency RMBS credit superior to high yield credit on a fundamental basis but the technical factors should ultimately prevail there as well. There is barely any supply of non-agency RMBS, especially compared to the extremely new issued heavy supply of corporate debt including high yield bonds and leverage loans. In fact, with a run off of the legacy product, the supply of non-agency RMBS is arguably negative. These corporate credit hedges were also a great example of how we’re not afraid of negative carry at Ellington Financial. We are total return oriented so when we think of risk reward is in our favor we’re willing to go short CDX or go short loss of TBAs work buy swaptions for that matter.
On last quarter’s earnings call, we talked a lot about our ongoing diversification efforts. These efforts are not only continuing but they’re started to generate significant positive results. Obviously our portfolio is still dominated by legacy non-agency RMBS and agency RMBS, and these factors continue generate strong income for us. Nevertheless, I am really pleased with how we planted the seeds for growth over the coming months and years in so many new areas and how many of those seeds are sprouting already. As Lisa mentioned, a full of 35% of our non-agency gross revenue at $10 million out of $28.3 million were from four areas away from legacy RMBS. Our CLO portfolio now represents over 12% of our non-agency portfolio, up from 7% in the first quarter and 5% at year end.
We are still focusing on the legacy CLO sector and the flood of new issued CLOs is actually helping us build our portfolio as it helps to press prices for the legacy sectors which have to sold by dealers and investors to make room for the new issues that seem to en vogue. Meanwhile our European MBS/ABS portfolio is already generating meaningful income for us. We of course also continually active in new issue CMBS pieces more generally our CMBS strategy overall has generated fantastic returns for us the first half of the year.
In all of our markets we continue to focus our efforts enhancing our sourcing capabilities and we have very tangible results here. We have expanded our staff in London focusing on European and MBS/ABS and even CLOs and on the private transaction side we just recently closed on a purchase of non-performing consumer loans from one of the periphery countries at pennies on the dollar or cents on a euro I suppose. In the second quarter, we closed on a private transaction evolving a non-performing mortgage on a Parisian office complex. At the very beginning of the third quarter we closed on a private preferred equity investment in a partnership that will acquire and manage equity and mezzanine investment and multifamily and other housing related properties.
Originating private commercial real estate debt related investments is another area where we hope to see significant growth and these investments of course are managed by Leo Huang, Ellington’s Head Portfolio Manager for commercial real estate debt. We also continuing to be pleased with our pipeline of distressed small balance commercial mortgage loans and are sourcing capability to the asset base. We’re seeing the advantages of our size in this environment. We’re not a $40 billion mutual fund that can’t be bought at $5 million investments we love $5 million investments. In many of the markets in which we’re active you don’t have to compete with behemoths you can get things a whole lot cheaper. That’s especially true in a distress space whether it’d be distress commercial mortgages or distress residential MPLs.
We only bought one MPL pool in the second quarter but based on our projections it was literally many 100s of basis points of wider in yield than where the big packages are trading.
We’re also seeing attractive opportunities to enter adjacent sectors by leverage our expertise and strategically expanding our team. In the mortgage origination space way to our advantage we’ve been patience. We have been moving a number of transactions towards completion. Earlier this year we hired two very senior and experienced professionals with deep relationships in the mortgage banking space and they are helping us source our strategic investments in mortgage originators and develop our non-QM mortgage business. I expect to have one or two of these investments closed in the third quarter and three or four in total close by the end of the year. These will be relatively small investments to start with but they should have the potential to generate a large pipeline of new investments for us especially in a non-QM, non-prime space.
We’ve talked in the past about how Dodd Frank the Volker Rule and Basel III are reducing liquidity in many of the sectors that we invest in has created opportunities by reducing competition. While there is another way to Dodd Frank is creating opportunities for us it’s creating opportunities for Ellington to hire incredibly talented portfolio managers who were managing proprietary books in investments banks. We’ve done this in a number of areas recently. But perhaps the most notable for Ellington Financial in the second quarter is our recent hire, Will Messmore, who will be focusing on the ABS and consumer loans spaces. Will has well established relationships with many consumer loan and small business loan originators and long experience investing in these areas.
It’s an incredibly fragmented space so we expect to generate a wide variety of investments including whole pools consumer and small business loans, investments in securitizations all throughout the capital structure and even strategic investments in the originators themselves, again all throughout the capital structure. As usual we won’t want to compete with the big money center banks. So we’ll be then showing where they can’t again thanks to the new regulatory regime that the banks find themselves in.
As you tell we think that each of these areas has a potential not only to generate great returns but to be a source of significant future growth as well. And as you can also tell we have many, many irons in the fire. These strategies are not your run off strategies they each have substantial barriers to entry and to execute these strategies we are not only drawing on our existing expertise and infrastructure but also bringing in new resources. Meanwhile, as you can see from our results, we continue to execute on our older strategies even as we are setting the stage to capitalize on these opportunities that we see coming down the road in so many different markets. It’s an exciting time for us, and I think it’s only going to get more exciting. This concludes our prepared remarks. Operator.
The floor is now open for questions. (Operator Instructions). Thank you our first question is coming from Steve Delaney with JMP Securities.
Steve Delaney - JMP Securities
Hey, good morning everyone and I don't know whether to say congrats on another solid quarter or wow about all the new initiatives that Larry outlined in terms of diversification, but congrats on both fronts. I’d really want to focus on this diversification if we can. And I don't know. Obviously when you bring out new products to the market, I'm sure you want to be somewhat reserved in telling the whole world what you are doing. But given the restart of a whole loan -- resi whole loan business with the two guys you hired, could you at least maybe talk about how, mechanically, what you're trying to do there?
And it sounds like that you are definitely not trying to be generic, just in terms of a volume play, whether it's prime or conforming, but you're very much focused on this non-conforming market. Can you say anything about where maybe you see, whether it's through a specific product or structure, that you think the market the mortgage market needs? And as you acquire those loans, then what's the pipeline, Larry, between either holding them in whole loan with financing, or do you envision the securitization market eventually being the ultimate source? Sorry for the long question.
No, no I get it. Thanks Steve. So it’s going to be tailored each particular opportunity. So it’s not going to be one side if it’s all. I think, in general, we would like to make strategic investments in originators where personally obviously we believe in the platform and management. Well we can also add value by providing an outlet for non-QM and help them grow that way. So I think that’s a common theme to most of these investments that we are looking at; if it’s tough for these originators to raise capital. So, clearly, we are going to charge a high rate for our capital and it could take the form of subordinated debt, senior debt, it all depends upon where it is? How evolved these companies are? Obviously building covenants for our investors when we can we will take equity stakes and again in some of the smaller cases, there will be significant equity stakes that we think will reward us very nicely down the road as these originators grow with us. So it’s all different sizes of looking at, again, off the beaten track, not just the vanilla Agency conforming mortgages, but looking at helping these originators grow through we see as the opportunity in the non-QM spaces.
Steve Delaney - JMP Securities
It sounds like that fits the same theme of operating in smaller markets, more niche markets. And as you expressed, putting $5 million to work, you can get much better returns and you can if you're just trying to gain market share.
So the way that we look and I am taking a lot of these cases, they will be cheap options in terms of the profitability of these enterprises themselves but also just importantly if not probably more importantly via pipeline of investments for us going forward. And then to answer your sort of the second half of your question as we buy these investments, I think initially we will buy that for cash, I think we will finance them, the big banks are actually willing to give pretty good terms, financing loans, there are number of banks that are just ready in terms of financing non-QM production and then of course securitization down the road, still too early to tell when that’s going to happen. The economics still aren’t great but the important thing for us is to be buying loans that we think makes sense and offer a substantial yield premiums over the regular loans that are originated in the market place and the super jumbo, super prime loans that we probably won’t be participating in. We’re looking definitely for higher yielding products that even if we do have to hold it for a while on a leverage basis versus the lines we can get the ROEs we think will be excellent. So we are going to be able to be patient there.
Steve Delaney - JMP Securities
We noticed yesterday that Zeis actually bought a platform down in the South. It sounds like what you're trying to do is maybe avoid the licensing headaches and maybe the CFPB risk of letting someone else kind of own the platform and deal with all that and you be a money partner. Am I reading that right?
Yes and no. I think yes, certainly in terms of it will be an existing originator that already has licenses maybe in some cases will continue to expand licenses and dealing with regulators will be them. But that being said, in many cases these stakes will be significant enough or are some of our controls will be significant enough that it may require applications for change of control on the licenses so when that happens typically the investment would initially be structured as a debt investment and would only convert to an equity investment upon successful approval on the change of control. You don’t have to have control for sales to have to apply for change of control in many jurisdictions many states.
Steve Delaney - JMP Securities
What do the lawyers call that, piercing the corporate veil or something like that?
No, I don’t know. Let’s not go there, no.
Steve Delaney - JMP Securities
Okay. And just one last thing, I'll turn it over to somebody else. I think the market I was surprised to see this Freddie Mac kind of on the QT brought this $600 million NPL deal last week. And I was just curious if you guys were able to get a look at that. And do you have any expectation that we are going to see a lot more of that paper coming from Freddie and Fannie going forward?
Steve, its Mark. So yes we did look at that and Freddie Mac and Fannie Mae very large holders of a NPLs and OREO in the country and if you think about the how they are being managing conservatorship with the portfolio the target reduced their agency portfolio and they have to refuse their credit sensitive portfolio that’s the motivation behind a lot of their activity for the last year where they’ve been aggressive sellers of CMBS. They’ve been aggressive sellers of non-agency securities. They’ve been active issuers of the drift transfer deals the cast and the stacker deals and I think this is just another arrow in their quaver to get out of risk assets is to some the sale.
So we looked at it I guess it’s in my prepared comments we have been we are a little bit less optimistic than many some other market participants about the extent to which properties that have been delinquent for a long periods of time are participating in sort of the broad measured home price appreciation that you might see coming out of Case-Shiller or CoreLogic. So I congratulate Freddie Mac on good execution levels but those assets didn’t look to us at levels where they traded and some sense that would be driving the kind of returns you want to deliver to shareholders still Larry mentioned we bought a smaller pool of NPLs that was not nearly as hotly contested as on the Freddie Mac portfolio at levels we think will drive the kind of return we want to deliver to shareholders.
So I think you will see more of that paper coming out of Fannie and Freddie it’s interesting those risk transfer deals have widened substantially this quarter end yet they still priced another one last week so even if you look at even if the wider levels those risk transfer deals I think make a lot of sense for both companies against the backdrop of the much wider GPs we were able to get in the marketplace. So we expect Fannie and Freddie to be sellers of credit assets serving in multiple in all those multiple ways in the market. But yes I think you will see more of that from both agencies.
Yes, let me just add to that. So first of all and Mark correct me if I’m wrong but I think the Freddie auction which was done through BAML. And BAML actually acted as principal in that trade. I think it was there are at least two pools that it was divided into and we’ve been on one of them. The level at that it’s traded at the pool that we’ve been on we were shocked actually how high it traded. And what happened. So first of all even though I don’t know whether Freddie has announced anything else and I don’t think Fannie by the way has announced anything at all about its plans to sell NPLs.
But based upon this but we’re sort of advertised as a trial balloon the Freddie Mac I think that they’re going to come back to market. Now after they got the executions that they got and of course BAML who conducted the sales saw firsthand what those price were BAML turned around from what I understand and announced they would be selling the pools big pools of NPLs. So, I think that this market is getting very heady and you’re seeing the supply come out in response to these prices. As Mark mentioned in many cases the prices could be even lower and still make sense I mean so for example on these risks transfer deals which we haven’t liked as you know when you look at the GCs that are being charged it’s still a massive arbitrage for the agencies to be selling these risk transfer deals.
They are getting out of their risk at a fraction of where they’re putting it on. So this is all going towards where to supply and volume of the supply that we see coming in all sorts of sort of mortgage credit products.
Steve Delaney - JMP Securities
Well, thanks for the comments guys, and congrats on your credit call going into the third quarter. We will keep an eye out for the progress on diversification as we move towards the end of the year. Thanks.
Our next question comes from the line of Jim Young with West Family Invesments.
Jim Young - West Family Investments
Yes, hi. You mentioned that number of different assets you are involved in and the non-agency segment on page 11 of your presentation. But the one area that isn't mentioned are re-performing loans. I was just wondering what your thoughts are on this area?
Hey, Jim it’s Mark. We have looked at them and they traded very high percentages of BPO or broker price opinion. So we see it -- in a large part we see it a sort of just an HPA play and we think we can through the discount and not agency securities, we think we can just get ourselves into sort of a similar risk positions at lower price levels. Some changes in that market, we could be an investor, but the way we’ve analyzed this so far, the combination of either MPLs or smaller packages or discounted non-agency securities look to us like they gave us similar exposure at more attractive yields. But as Larry mentioned, there has been supply of RPLs, there has been a lot of supply of MPLs. So that price can change quickly. So we’re definitely keeping our eye on it.
(Operator Instructions). Our next question comes from the line of Mike Widner with KBW
Mike Widner - KBW
I guess two questions. The first one I already know the answer to but I'm going to ask anyway. So, this is right about the time you guys usually give the July 31 book value estimate, but I didn't see it anywhere in here. So should we expect a press release on that soon, or you want to give any sort of comments since you kind of indicated the things have been going well in terms of your strategy since quarter end?
Yes. So the way it works is I would say almost always we put out that estimate at the close of business on a sixth business day of the month and that is just based upon really our valuation process here and getting all the valuations from dealers and pricing services and what not and in compiling that, there is a process. So it’s sort of random in terms of where that sixth business day falls relative to when we have this earnings call. Sometimes it’s a day before, sometimes it’s a day after two, so pretty close. So in this particular case with the weekend having fallen in the middle here we are looking at seventh of the month which is tonight. So that’s when we expect to put it out
Mike Widner - KBW
All right, so I've got to wait another…
Couple of hours.
Mike Widner - KBW
Couple of hours for that. All right, so, let me just follow up on one of the things you said. I wanted to make sure I kind of heard you correctly and was just trying to reconcile these things. At some point during your comments, I thought you gave an example of some of the GSE risk-sharing bonds, transactions not -- trading not so well this quarter, and I thought I heard you say that one of them was down like 7 points as an example. And then at the same time, you were talking about the NPL deals kind of trading or selling at pretty lofty prices. I'm just sort of trying to reconcile that. I mean it seems that's two different market views on credit it would seem.
Yes, this is Mark. Right, so that Freddie -- I have to think back. That Freddie NPL transaction, I think that might have been awarded last week or the week before and some of the weakness in those Fannie Freddie risk transfer trades has really sort of picked up steam this week. So I think some of that is correlated to big stock market drops we saw in the last week. And also, in the case of the Fannie Freddie deals they had another deal in the market that actually priced yesterday. So they are very different buyers. One is bond which is why we traded in the sense of the risk sharing transactions. These bonds by the way are very leveraged to the assumptions. They are very very thin slices in the capital structure, so the type of thing where you’ll be fine until you are not, and then you actually get wiped out if future defaults and severities end up being higher than you thought. So I think they are much more subject to sentiment, a very different buyer base if you see if you think that home prices are going up you aren’t really that doesn’t necessarily lead to much higher prices in terms of on the risk sharing transactions just leads to the fact to go get your principal back so you’ll be rewarded from that standpoint but you’re sort of capped out. On an NPL trade you really believe that when you resolve these houses you will get much higher prices then that’s going to accrue to your benefit dollar for dollar. So this is different trades, different buyer base, and different risks.
Mike Widner - Keefe Bruyette & Woods
Yes, I mean that certainly makes sense and I appreciated all that. I guess it seems like to me just more broadly speaking is -- as you guys indicated, there is sort of a voracious appetite out there for risk of any sort to a degree. And we've seen prices kind of rally on just about everything. And it feels like, over the last few weeks, we've seen sort of some fraying around the edges and it's not a wholesale selloff yet but you are seeing pieces of it where the enthusiasm wanes and then you see those pieces fall out, but certainly there still seems to be a strong bid on a lot of stuff out there. I mean, is that fair to say?
Yes, absolutely. But as we know things are much more volatile and scarcely used to be so as if corporate credit starts to crack and there are outflows the same that’s the same buyer base they’re going to dump maybe some of these risk sharing tranches as well nobody can dump NPLs it just doesn’t work that way. So that market the prices are going to move a little more gradually than in the other markets.
Mike Widner - Keefe Bruyette & Woods
Well, thanks for the comments and the color, as always guys, and another solid quarter. Congrats.
There are no further question at this time. Ladies and gentlemen, this concludes the Ellington Financial’s second quarter 2014 financial results conference call. Please disconnect your lines at this time and have a wonderful day.
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