Ellington Financial Inc.
Q3 2017 Earnings Call Transcript

Published: 11 Nov 2017

[Operator:]

Good morning, ladies and gentlemen, thank you for standing by and welcome to the Ellington Financial Third Quarter 2017 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.

[Maria Cozine:]

Thanks, Christine, 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 16, 2017, 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 third 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.

[Larry Penn:]

Thanks Maria, and welcome everyone to our third quarter 2017 earnings call. We appreciate you taking the time to listen to the call today. For another quarter, credit spectrum remained tight and volatility low. The MOVE interest rate volatility index again hit a new all-time low and the VIX hit a 23-year low. The yield curve flattened for the third consecutive quarter. During the third quarter, Ellington Financial benefited from strong performance in our CMBS, distressed corporate and corporate credit relative value strategies, and in our Agency RMBS strategy as well. While our credit and agency strategies are both performing well, our earnings per share of $0.19 still fell short of covering our full dividend. We are still not as fully invested in our credit portfolio as we need to be in order for our earnings to be able to more consistently cover our dividend. Our credit portfolio did increase by 8% in the third quarter to $741 million, but we still have more work to do. A significant event in the third quarter for us was our successful completion in August of Ellington Financial's first issuance of unsecured debt. We issued $86 million in unsecured senior notes, rated A by Egan-Jones with a five-year maturity and a fixed rate of 5.25%. The notes were issued at par to yield 5.25%, which we believe was excellent execution and the offering was placed with 12 institutional buyers. These senior notes provide us with an attractive source of long-term non mark-to-market financing, particularly for our harder to finance assets, and the issuance has further solidified and diversified our balance sheet. Initially, we use the proceeds from the offering to repay our most expensive repo financing. But on a longer-term basis, we expect this financing to be extremely helpful in being able to grow the asset side of our balance sheet and enhance earnings. As you can see on Slide 7, our credit assets overall are yielding much more than 5.25%, of course, by doing a deeper dive beyond many hard to finance asset types, which we can add much of, thanks to these notes, that can yield well into the double-digits, making the potential benefits of this financing compelling. During the third quarter, we continued buying U.K. non-conforming RMBS, which we believe currently offer superior value to their U.S. counterparts. We also net added assets in our CLO and consumer loan strategies, and we continue to purchase non-QM mortgage loans as we gear it up for our first securitization of that portfolio. Meanwhile, we net sold assets in performing leverage loan strategy where the market had tightened significantly and in CMBS where yields spreads though yields spreads fluctuated, but where our cash bond assets significantly outperform their CMBX hedges. In our Ellington self-managed CLO strategy, we sold some of the mezzanine tranches that we had initially retained from our first securitization, thereby boosting our return on capital on our remaining retained investment. Our corporate credit relative value strategy contributed solid gains this quarter and we view this highly liquid strategy as compelling source of return, while we continue to ramp-up our other high-yielding strategies. Similar to prior earnings calls, Lisa will run through our financial results, and Mark will discuss how our markets performed over the quarter, how our portfolio performed and what our market outlook is. Finally, I will follow with some additional remarks and the opportunities we are seeing and our plans for the final two months of the year, before opening the floor to questions. And with that, I'll turn the call over to Lisa.

[Lisa Mumford:]

Thank you, Larry, and good morning everyone. My remarks will track our earnings attribution slide, which is Number 20 in our quarterly deck. In the third quarter, our credit strategy generated growth income of $7.9 million or $0.24 per share, and our Agency strategy generated growth income of $2.8 million or $0.08 per share. After expenses and other items, we had net income of $6.2 million or $0.19 per share. By comparison, in the second quarter, we had net income of $5.1 million or $0.16 per share. The following is a brief overview of the drivers of our Credit and Agency results. In our Credit strategy, we had a $0.04 per share over quarter-over-quarter decline in our growth income. While we had higher interest income and lower cost related to net credit hedges and other activities, we did not have net incremental income from trading and valuation changes in our portfolio in the form of net realized and unrealized gains during the period, like we did last quarter. And we also had higher quarter-over-quarter interest expense, which was principally related to our senior notes offering completed in August. One of the key highlights of our credit results for the quarter was the increase in interest income. As we have grown the size of the portfolio over the course of 2017, we have seen steady increases in interest income. We expect to see further growth here, as we add more assets and become more fully invested. In the third quarter, most of our portfolio growth came from our non-term loans, consumer loans, European MBS and CLOs. We even added a small amount to our U.S. non-Agency RMBS portfolio whereas in previous quarters, we've been net selling from this portfolio. During the third quarter, our credit portfolio increased by 8.3% to $741.3 million. Since year-end 2016, the portfolio has grown 34% in size. As I mentioned, we did not have net incremental income from trading and valuation changes in our portfolio in the form of net realized and unrealized gains during the period, but essentially net realized and unrealized gains were offsetting this quarter. We monetized some gains in some sectors of the portfolio such as U.S. and European non-Agency RMBS, but we also saw valuation declines in certain sectors such as CLOs. Our turnover was lighter this quarter as we worked to invest the proceeds from the debt offering. We had significantly reduced losses from our credit hedges and other activities in the third quarter compared to the second quarter. The main driver here is in other activities on the Slide 20, where we report the results of the derivatives portion of our corporate credit relative value trading strategy. While we don't necessarily consider this strategy to be a core credit strategy and the returns can vary from quarter-to-quarter, overall it has served us very well and has had a solid positive impact in our results. I also mentioned that we had higher interest expense during the quarter, principally due to our senior notes. We have included all of the interest expense related to our $86 million, 5.25% mid-August debt offering in our credit results. Although this unsecured debt is not tied to or secured by specific assets, we view it as a way to fund some of our harder to finance credit assets. During the quarter, we initially used the proceeds from the senior notes offering to pay down some of our higher cost repo, so you'll note a decline in our quarter-over-quarter weighted-average credit repo rates. As we continue to ramp up the portfolio, we expect that our repo borrowings and other borrowings will increase as will our utilization of alternative arrangements such as term financing facilities and securitizations. During the quarter, we increased our credit debt-to-equity ratio based on allocated capital from 0.86

[Mark Tecotzky:]

Thanks, Lisa. It was generally a strong quarter for Credit strategies, but there were some pockets of weakness, primarily in high-yield and CMBS. CMBS was impacted by concerns about retailers as there was more bad news from department stores like J. C. Penney's, Sears, Macy's. Our diversified credit portfolio performed well. We made significant progress in many of our strategies. Ellington Financial had some very positive developments in the quarter. Larry mentioned our debt issuance. Long term, it's a great benefit to the company to diversify our funding sources and to lock in longer-term borrowings. Since we try to manage our overall portfolio to a roughly net-zero duration, promptly upon issuance of this fixed debt, we effectively converted that into floating rate debt by receiving on the similar-maturity interest rate swap. The debt capital raise doesn't increase our G&A, so as the proceeds are deployed into higher yielding assets, we will have more interest income spread over the same expense base. Another nice development this past quarter was that the CLO debt tranches that we issued have been trading well in the secondary market. These tranches, which are effectively the liabilities of the CLO trust are now trading at higher prices than when we issued them. So that gives us two positive benefits. First, we initially retained some of these tranches, so we've been able to subsequently sell out of some of the profit. Second and more importantly, if this dynamic persists, we should be able to issue future CLO debt tranches at tighter yield spreads, which would increase the yield on the equity that we retain and we are currently acquiring assets for a second CLO deal. Issuing our own CLO was an important diversification of our CLO strategy. Historically, we've successfully invested in the secondary market, in the debt and equity debt of CLOs issued by others. This deal gives us the opportunity to invest in the debt and equity of CLOs that Ellington issues and manages, as well as continuing to take advantage of CLOs secondary market opportunities in the much broader market, both here in the U.S. and in Europe. So, while it's been a long road, our efforts are now bearing real fruit in fulfilling our long-term goal, which is to use a combination of strategic investments and operating businesses, flow agreement and our own securitizations to manufacture high yielding assets for Ellington Financial. And then contrast to what's going on the vast majority of the QSub-based sectors, the assets that we are creating are not having their NIM compressed away by QE-driven pursuit of yield. For example, we expect that through retention of the CLOs that we sponsor, we'll be able to accumulate a sizable CLO equity portfolio with loss adjusted yields in excess of 20%. As we mentioned in our earnings release, we have now reached critical mass in our non-QM portfolio and we expect to complete a non-QM securitization in the near future. We expect that our retained interest in a non-QM securitization will constitute a very high yielding asset for Ellington Financial. Every single one of the loans in our non-QM portfolio was originated by LendSure, a mortgage originator in which we maintain a strategic equity investment. The performance of LendSure's loan production has been excellent and LendSure continues to grow the origination volumes. So, hopefully, our second securitization won't be far off. Ellington Financial's ability to access the robust securitization markets as a way to leverage assets is an important part of our strategy. Securitization reduces their dependency on repo, it gives us longer-term financing and it helps build our brand. By first purchasing the underlying assets ourselves and then securitizing as opposed to purchasing already issued securitization tranches, we are able to achieve two significant benefits. First, we have better control of the underlying credit quality; and second, we are able to keep our yields higher by not having to compete with so many other investors. Also, after a successful securitization of a block of asset, we generally see a drop in our repo financing costs for these types of assets, which is another ancillary benefit to us. In fact, repo financing terms across many of our strategies continued to improve, which is providing us with another nice tailwind. Shifting gears away from our Credit strategies; our Agency strategy had a strong quarter. Agency MBS had lagged the tightening in spread products for the first six months of the year. In part, spreads on Agency MBS had previously stayed wide and have concerns about the pacing and magnitude by which the Fed would reduce their MBS portfolio. We got that clarity in Q3, and once that cloud of uncertainty was lifted, MBS substantially outperformed both treasury and swap hedges leading to a very strong quarter for us in our Agency strategy. We still view Agency MBS as attractive, even after the strong performance in the third quarter. The main objectives that we had set out for this past quarter and that we accomplished were

[Larry Penn:]

Thanks, Mark. Last week, we reset our dividend to $0.41 per share. Having net return capital to shareholders over the last four quarters, it was important for us to realign our per share dividend level back in line with our per share capital base. Our dividend is sized to level so that looking forward to when our portfolio becomes fully ramped. We clearly see the ability to consistently cover our dividend through earnings. By lowering the dividend, we also retain more capital for potential repurchases under our share repurchase program. In fact, with their stock price having moved lower after this past quarter-end, our 10b5-1 program kicked in again and we’ve resumed purchases. As we move into the final months of 2017, our focus is on growing the credit portfolio and thereby expanding earnings. Despite tighter spreads in the third quarter, we were still able to increase our credit portfolio by 8% without compromising yield or quality. Although the 8% quarterly growth rate isn't as high as we targeted, we are getting closer to target levels. If you look at where our portfolio was at this time last year, we had just $490 million in our credit portfolio. As of quarter end, it stood at over $741 million and over 50% increase in just one year. But note that this net growth in our credit portfolio doesn't even capture the full scale of our purchasing pace, because during that time, we also securitized some credit assets, which reduced capital deployed, while of course enhancing yields. And also, because during that time, some of our purchases were just offsetting sales of lower yielding assets to be sure the low volatility environment and heightened competition for assets have made it challenging to ramp-up the portfolio as quickly as we had originally planned. But if there is one thing that we won't compromise on, it's our acquisition standards. Investment discipline is critical in the current market environment, where investors are starved for yield and the market is flushed with liquidity. It makes perfect sense in this environment that we're focusing on shorter duration assets, hard to source assets and assets that we effectively manufacture ourselves such as to flow agreements and our securitizations. We also have no intention to start hedging interest rates as fully as we have always tried to do, and we have no intention to just throwing the towel [ph] on credit hedging. Over the long-term, we believe that our discipline will pay off. We appreciate your patience and look forward to updating you on our progress in the coming months. This concludes our prepared remarks, and we're now pleased to take your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Steve DeLaney with JMP.

[Steve DeLaney:]

Good morning, everyone. And Larry, I applaud the buyback activity for sure. It's good to have that plan in place. Can you remind me the total size of that authorization of the plan you filed?

[Larry Penn:]

1.7 million shares, okay. So that's going to be in the high-20s million worth at current prices. And of course, that can always be reauthorized if we are getting close to running out.

[Steve DeLaney:]

Understood. Okay, thank you for that. Your non-QM securitization, this would be your first. Is this going to be rated or non-rated or have you not made that that call yet?

[Larry Penn:]

Yes, it would be rated, clearly. It's - we've been a little careful, technically these things are private placements, so we want to be conservative and not talk too much about these types of things until they're actually launched. But we can certainly talk about what we've been planning all along, which is, yes, it's a rated deal.

[Steve DeLaney:]

And do you have - can you talk about approximately the size of the transaction? I won't ask you about returns or advance rates.

[Larry Penn:]

I'd rather not, although the - of size of our portfolio. We've been talking about how critical mass is in the sort of low-to-mid $100 million range, so between $125 million and $150 million call it. And if you look at size of our portfolio at the end of the third quarter, is consistent with that.

[Steve DeLaney:]

Okay. Your CLO; not surprised that, one that it's performed well and that you've found some incremental value in retained bonds above the equity. The collateral there, is this fully syndicated bank loans or is what you - that's what we normally see in these CLOs, is it the same with yours?

[Larry Penn:]

Yes, but definitely not the on the run. So, Mark, do you want to talk a little bit about that. I can talk about that.

[Mark Tecotzky:]

Yes, we have a lower ratings distribution than a typical CLO. It's typically loans from companies that have smaller amounts of debt outstanding. So, a lot of the names in our CLO, you wouldn't see representing necessarily in some of the other CLOs that are out there.

[Larry Penn:]

The other sponsors of CLOs, they're typically trying to minimize their retained interest rate. That's one of their goals often [indiscernible] super-highly leverage. And as Mark said, they're often going for the bigger names and what we've preferred to do is to do a deeper dive in sectors where we believe that we have more expertise, so more of an edge. The smaller names tend to trade cheaper, and as Mark says, we're also going higher in the weighted average rating factor or equivalently lower in ratings in order to capitalize on the fact that when you go to lower ratings, when you go to smaller deals, you've got a lot of the big players are not playing in those sectors. So, we want to go where things, we think, are - have much, much better relative value and we're not afraid to retain a bigger share. And in fact, when you look at the economics, we can achieve we think great yields on these retained interests with using a lot less leverage and is used in other CLO structures where you've got much higher...

[Steve DeLaney:]

You probably like having that thicker slice at the bottom, you get to deploy more capital, I assume whereas someone else would have...

[Larry Penn:]

Yes, that's a benefit, absolutely, yes.

[Steve DeLaney:]

Someone else would just be in a gross AUM accumulation probably Mark that...

[Mark Tecotzky:]

Yes, there are definitely some CLO sponsors who are just - are motivated more just in terms of increasing assets under management. So that's - obviously for Ellington Financial, that's not a motivation.

[Steve DeLaney:]

Do you have any flexibility in the management agreement to substitute some percentage of "other assets in that pool", I mean does it give you some sort of flexibility of moving around or is it pretty well defined is the asset class that has to go in the [tranche]?

[Larry Penn:]

Yes, it's pretty well defined, it's pretty well.

[Steve DeLaney:]

Okay. And lastly, you commented on the MOVE index and just volatility - low rate volatility and credit spreads seemed to only be going in one direction, and I guess we call that volatility. Just curious because I would think that a low vol type of environment does impact your relative value creating strategy in terms of the types of returns that you might otherwise realize. I guess, just given the Fed policy changes, political and global instability, why is volatility so low in your view? That would be helpful. Thank you. That's my last question.

[Larry Penn:]

Will I get a Nobel Prize if I answer that one?

[Steve DeLaney:]

Yes, absolutely.

[Larry Penn:]

Yes, I mean I think, Mark mentioned that system is flushed with liquidity and we try not to cake a view on such large macro factors like overall volatility, where overall credit spreads are moving, with rare exceptions obviously in 2009, when Ellington Financial in fact having preserved capital through 2007, 2008, the toughest time in the mortgage market, and we did take the view that we needed to take a strong view that spreads were way too odd. But we - I think in terms of the more - the bigger sort of as much a two sub-sectors of the market, we're not so keen to just load up on those at huge leverage, right. And then, we've been in fact move in the opposite direction, which is you're moving to shorter duration assets, for example, consumer loans, for example, the small balance commercial distressed loans that we love. And we think that by moving into sectors like that, which is shorter duration and uncorrelated, we can hopefully insulate ourselves from - if this trend does reverse itself and nothing goes on forever, right, where volatility increases and maybe spreads widen a lot. But we don't want to - we never wanted to overleverage and we surely don't want to overleverage in a tighter spread environment. But volatility is low, has - it's always good news, bad news, right. It's - you're right, in terms of our trading strategies. As Lisa mentioned, we're turning over the portfolio a little less, that's combination of both, I'd say three factors. We've got more capital to deploy, to ramp up the portfolio where it needs to be and of course following our debt issuance. So, we're just trying to not necessarily shrink the portfolio, but grow it obviously. We are also not turning over as much, because it's just the nature of the assets that we're - now, more and more of our portfolio is less liquid, albeit shorter duration, which is obviously a mitigant to less liquidity. So, factors like that. I think you'll continue to see our turnover in those strategies of ours to be lower than maybe they were in the past, when we were 80% non-agency RMBS, which was much more able to trade actively and generate additional returns that way.

[Operator:]

Our next question comes from Doug Harter with Credit Suisse.

[Doug Harter:]

Thanks. I know you said that the stock repurchase plan had kicked back in, but I was just hoping you could sort of compare kind of available returns on repurchasing your stock today versus deploying it into your target assets and especially given that, that pace has been, as you said, a little slower than expected?

[Larry Penn:]

Yes, I think that we're looking at it in terms of - certainly we have the available cash, and I think as I said on previous calls, when our stock gets closer to that 80% of book level and it's currently - today, based upon our most recently published book, I think it's just a hair above 80%, around 81% maybe. That's where we want to be actively buying. I think we mentioned that at 85% of book, that's where we're not inclined to buy. And obviously in between is where we might be buying a little more or little less. So that hasn't changed. I think that we want to focus on earnings per share, we obviously don't want to shrink the company down too low, but that's not really a factor, in terms of - if you look at the pace at which even buy, I mean we're somewhat constrained in terms of our repurchase activity by our average daily trading volumes, right where we don't want to be too heavy-handed about it. And so, I would say that, that's how we're looking at it. It's not - there's no formula, I think, in terms of where we see potential leverage returns by deploying into our assets that we've been buying versus the amount of discount. But while we have the available capital, we want to take advantage of that, and obviously these things can be immediately accretive to our book value and therefore to our - hopefully our stock price and to our economic returns. So, we want to keep doing that, I think, at the types of the measured pace depending upon where our stock prices.

[Doug Harter:]

Thank you. And then, if you could talk about kind of how you - when resetting the dividend, kind of how you picked that level. I know you said it's kind of a targeted return on the new book value versus kind of what you've been - the levels that you've been earning recently. And kind of over what period of time you might expect to be able to sort of cover that dividend from spread income more consistently?

[Larry Penn:]

Yes. So that's a great question. So, let's hit that one at a time. We resized the dividend so that if you assume, for the next couple of quarters, that we'll be getting closer to hitting that dividend, but won't quite make it, right. So, then we'll have a little more return of capital in our distribution, so that will lower book value per share a little bit. And by the way, I just do want to add one thing, which is that our structure, just keep in mind that our distribution is not per se taxable to investors. Investors are only taxed by and large on our earnings. So, our return on capital really is the return on capital. But whenever that aside - so, if you think of a couple of quarters where we'll hopefully get closer to that $0.41 level, but won't quite make it. So, you'll see a slight, further reduction in our book value per share, then we're sizing it to again roughly a 9% yield, roughly which is where we had reset it a year ago. In terms of when we think that will happen, I think it's possible towards the end of the first quarter. I think more likely, again, we - surprised on the downside I guess in terms of - and it's taking a little longer than we like. So, I don't want to put too aggressive a prediction here, but we're certainly hopeful that by sometime in the second quarter next year that we would be able to have our portfolio at the levels that we need in order to hit that level.

[Doug Harter:]

Thank you. That’s very helpful.

[Operator:]

Our next question comes from Eric Hagen with KBW.

[Eric Hagen:]

Thanks, good morning. Maybe just expanding on your last comments right there to Doug's question, when you get to that run rate that you want to hit, I mean what kind of leverage do you think you're operating with?

[Larry Penn:]

I think it's really hard to say, because it depends upon, we're doing the securitizations; some of them may be consolidated, some of them won't be. So, I'd rather not put a number out there, other than say that we've, I think, been always very prudent about our leverage and we certainly view the leverage that we got from the unsecured debt deal that we just did as being a lot safer, type of leverage obviously five-year unsecured. So, I'd rather not put a number on it. But if you - you can see how our credit leverage has been creeping up and I think that might be a guide.

[Eric Hagen:]

Sure. That makes sense. And then, just trying to get a sense for the run rate we can expect to see from LendSure following what I would expect to be a securitization very soon, are we talking in...

[Larry Penn:]

Yes, you mean like the leveraged - sorry the yield on our retained fees?

[Eric Hagen:]

If you want to answer that, that'd be great. But I was actually talking more about just the pace of acquisitions from LendSure into a - on either a credit line or into a securitization after you do the first one? Thanks.

[Mark Tecotzky:]

Yes, this is Mark. So, there is a big seasonal component to mortgage originations. So, I'm going to sort of normalize things for an entire year. LendSure; you know I think those guys can get up to, in the next - they can kind of average a run rate between $20 million and $25 million a month.

[Eric Hagen:]

Short term?

[Mark Tecotzky:]

Yes, short-term. And then, they have a lot of geographic expansion they can do. They are not licensed in every state. There are certainly some markets we think will be a bit of fertile territory for their type of origination, their type of underwriting that they're not in. So, I look for them to grow by expanding their geographic footprint, not by sort of broadening out the sort of the credit box.

[Eric Hagen:]

Got it. Thanks.

[Operator:]

Our next question comes from George Bahamodes with Deutsche Bank.

[George Bahamodes:]

Hi guys, good morning. You had mentioned that the unsecured debt issuance of $86 million, a majority of that or the entire amount was used to repay expensive repo during the quarter, has any of that been deployed to credit assets in the fourth quarter as of today?

[Mark Tecotzky:]

Sure, yes. I don't have that number, but absolutely we continue to - I mean, it was deployed - we didn't mean to imply that in the third quarter that that's all we did, was to pay back some of our high cost repo and then we didn't want to imply that we didn't do any asset purchase after that. Absolutely, we started to - we just wanted to let people know that that's why you might have seen a decline in our repo borrowings. That was the immediate best use of that cash that we had, which was burning - it was burning a hole in our pocket. We have all this high cost repo, we don't want it to sit in a money market at LIBOR flat, if we're lucky and meanwhile, we're paying LIBOR plus 200 on some repo. So that was the first immediate use of the cash. And then - but absolutely right away, we started to buy stuff and that's why - certainly one of the reasons why our portfolio increased and why we've still got a lot of dry powder, as you saw at the end of the third quarter.

[George Bahamodes:]

Okay, got it. Thanks for clarifying that. That was it from me.

[Operator:]

Our next question comes from Lee Cooperman with Omega Advisors.

[Lee Cooperman:]

Hi. Let me try to help you guys think a little bit out of the box. We went public on, I think October 7 of 2010 at 22

[Larry Penn:]

Yes. So again, too much capital, still think it's a short-term phenomenon. We have all these different strategies that we're seeing good opportunities in. We've talked about them a lot on the call and I think that we do want to return capital to shareholders, obviously, and we do want to continue repurchasing stock. I will say that when we’ve tried to be - we haven't seen really very many individual shareholders comes to us and want to sell stock at these levels, understandably.

[Lee Cooperman:]

Why don't you just make an offer to the public - in the public arena. Just saying, you know companies are doing this very frequently these days. MVC Capital did a tender offer, they were three times oversubscribed or two times oversubscribed. Just make an offer at a price that you feel is a good investment for those of us not tendering who want to increase their ownership of the company rather than buying it back in ones and twos [ph] in a quiet way?

[Larry Penn:]

Well, I think at these levels that's an interesting idea. Again, we wouldn't want to - yes, I think it's an interesting idea. We wouldn't - see I don't think we'd want to do anything though that would shrink the company too much. I don't think that would make sense. Especially since, as I said, I think it's only - if we think we're going to be hitting it, let's just say by the end of the second quarter next year, for example, I don't know if that's such a great thing.

[Lee Cooperman:]

Yes, if you're right, I mean I think this was the kind of the exact conversation where we talked about going into consumer loans, we reset the dividend to $0.45.

[Larry Penn:]

You're right, you're right.

[Lee Cooperman:]

Exactly the conversation we had, it didn't work.

[Larry Penn:]

It didn't work in the sense that we were much slower to deploy than we hoped. But I think now - I do think we see the light at the end of the tunnel, but the tender is an interesting idea. Now, in terms of liquidating the company, we believe in the thesis and I just think that it is not something that we would consider at this time. And I would say that if you look at over our history, if you go back to when we went public, if you go back to when we were sort of quasi-public, as a 144A, which is now, we hit our 10-year anniversary a couple months ago, I think our returns have been excellent and I think that you're right, the stock price has it. It's not at all-time low, but it's low and some of that is because we've been returning capital, right. So, we do need to look, especially since as I mentioned, our dividend when we're returning capital is on tax, so we do need to look at what the total return has been for shareholders and...

[Lee Cooperman:]

Well, I mean, when you get down to it Larry, essentially, while your dividend is, I guess, tax advantage. We've lost $7 in stock price and you probably got $9 in dividends in one of the greatest bull markets of all time.

[Larry Penn:]

I'm not sure - that number does not sound right to me.

[Lee Cooperman:]

Well sure it is. Just add it up you want - just add it up to dividends...

[Larry Penn:]

Well, let's see it's on Slide - we can go Slide 23. If you look at Slide 23, our cumulative dividends in the second half of 2010, which is when our IPO was, for $4.95. Some of that by the way was post IPO and our cumulative dividends now are $22.62.

[Lee Cooperman:]

Well, I'm sorry. You're saying you paid out $22.62?

[Larry Penn:]

No, no. Sorry that's the cumulative thing. So where are we here, guys. Is that right? am I right?

[Mark Tecotzky:]

You got to subtract $4.95 from the $22.62, right? Yes.

[Larry Penn:]

Yes. So, I think I’m right. So, I think we've actually had [indiscernible] I think we've had over $18 because I think some of that was, I think it was over $18 of dividend.

[Lee Cooperman:]

Are you going back to like an earlier period of time?

[Larry Penn:]

Going back to the IPO, which is what I thought you did to $22.50 [ph]. But whatever, we can go through the numbers offline if you like and so I think...

[Lee Cooperman:]

What is the cost to run the company in terms of - as a percentage of the book value? Is it costing us 3% of the fee structure in the cost of running the company?

[Larry Penn:]

No. So, the management fee is 1.5% and the - what's the G&A on top of that?

[Lisa Mumford:]

1.3%.

[Lee Cooperman:]

So, 2.8%.

[Larry Penn:]

Yes, so that's...

[Lee Cooperman:]

In a world of less returns, maybe 2.8% is too high?

[Larry Penn:]

Well, let's see what those returns are, right. I mean that's - we think we can get - we think we can get north of 9% net. So, I think - let's see, I think we can do it.

[Lee Cooperman:]

Take a look at that tender offer, may make your job easier, you have less capital to deal with?

[Larry Penn:]

Yes. In the short-term, yes; but in the long term, I think would actually make our job harder, but it's an interesting idea.

[Lee Cooperman:]

Thank you very much for your responses.

[Larry Penn:]

Thank you.

[Operator:]

Our next question comes from Jim Young with West Family Investment.

[Jim Young:]

First, can you just remind us, how much stock does senior management own and is there any discussion internally about increasing your shareholder interests as you - as Larry, you said that you - do believe in the thesis, the stock appears cheap on a multiple book and a dividend yield basis. But can you just share with us your thoughts about additional [indiscernible] market? Thank you.

[Larry Penn:]

Hold on one second, I just - I need to ask someone a question here, hold on. Okay so - well Lisa, go ahead.

[Lisa Mumford:]

Management owns 11% of the shares and also it is outstanding. So that's over 3 million - 3.3 million shares.

[Larry Penn:]

Yes, so it's a - I mean that's obviously a very large investment for us. I've been sort of cautioned not to talk about management's intentions of buying stock at this time, but we do have a very large investment and we have done it in the past at times. The other thing that we've done - well, yes, so let's just - I think we should just leave it at that.

[Jim Young:]

Okay. And then the second question, with respect to the 2.8% fee and equity, some are like credit-oriented companies during periods where they've under-earned, have had temporary - have temporary fee waivers. Is that something that you would consider?

[Larry Penn:]

I don't - I think the fees are very fair, given all that we do for the company, given that the company gets the benefit of Ellington, which has 160, 170 odd employees and is in so many different markets. I think it's a bargain and I think that we - that yes, we've - our earnings have been lower, although now you've seen them creeping up again this year and hopefully that trend will continue. And I think if we were bigger, then I think that would be something that we might consider in terms of that the company were a lot bigger, then I think that's where you've seen more of the fee reductions. I actually don't think you've seen much of it for companies of this size.

[Jim Young:]

Well, Larry, you may think as a bargain from your perspective, but from a shareholder’s perspective, we've seen a continued deterioration in book value, which is a little bit larger than what we would have thought, number 1 and number 2, we've seen continued reductions in dividends. So, I would suggest that you may want to rethink that or consider other options to enhance your overall shareholder value because, again, you've been public now seven years and you - I think a number of shareholders have been very patient in the past, but I think that patience is starting to wane a little bit and we're just looking for additional opportunities for management to generating the income and/or figure out ways to enhance shareholder value. Thank you.

[Larry Penn:]

Thank you.

[Operator:]

And with that - that will conclude our question-and-answer portion of today's call. Ladies and gentlemen, we do thank you for joining our call this morning and we wish you the best of days. You may now disconnect your line.