Ellington Financial Inc.
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Third Quarter 2015 Financial Results Conference Call. Today's call is being recorded. At this time, all participants have been placed in listen-only mode 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 Ania Pritchard, Investor Relations. You may begin.

[Ania Pritchard:]

Thanks, Jackie. Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature and they are based on management's beliefs, assumptions, and expectations. As described under Item 1A of our Annual Report on Form 10-K filed March 13, 2015, forward-looking statements are subject to a variety of risks and uncertainties that could cause the Company's actual results to differ from its beliefs, expectations, estimates, and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of 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 with me today on the call Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford, our Chief Financial Officer. With that, I will now turn the call over to Larry.

[Larry Penn:]

Thanks, Ania. Once again it's our pleasure to speak with our shareholders this morning as we release our third quarter results. As always, we appreciate your taking the time to participate on the call today. First some highlights, despite difficult dynamics, where global market volatility caused interest rates to fall, and credit spreads to widen significantly across the Board, Ellington Financial was still able to generate a small profit for the quarter. Our credit hedges inflated us from some of the impact of widening spread. And we also benefited from the fact that many of the asset classes that we have been opportunistically rotating into as part of our portfolio realignment, like short duration commercial loans, and distressed small balance commercial mortgage loans, are generally less sensitive to movements in interest rates. 2015 has certainly been a challenging year so far, with a very high level of volatility. But we're excited about the investment pipeline we are building and the opportunities we are seeing. Things are cheaper now, and there's less competition. As announced in our earnings release, we refined our capital management strategy, including a new dividend level, and an accelerated pace of share repurchases. I will elaborate fully on that later in the call. We will follow the same format as we have in previous calls. First, Lisa, will run through our financial results. Then, Mark, will discuss how the MBS market performed over the course of the quarter, how we positioned our portfolio, and what our market outlook is. I will follow with some closing remarks before opening the floor for questions. As a reminder, we posted our third quarter earnings conference call presentation right on the Home page of our website, www.ellingtonfinancial.com. Lisa and Mark's prepared remarks will track the presentation. So if you have this presentation in front of you, please turn to Page 4 to follow along. I'm going to turn it over to Lisa now.

[Lisa Mumford:]

Thank you, Larry, and good morning everyone. As you can see in our earnings attribution table on Page 4 of the presentation, during the third quarter, we earned net income of $3.9 million or $0.12 per share. Our credit strategy generated gross income of $10.6 million or $0.31 per share, our Agency strategy had a gross loss of $1.8 million or $0.05 per share, and we had expenses of $4.9 million or $0.14 per share. Our return on equity for the quarter was 0.5% and on a year-to-date basis was 4.7% or 6.3% annualized. In both our credit and Agency RMBS strategies, during the third quarter, the significant tightening in swap spreads negatively impacted our results, leading to losses on our interest rate hedges. In both strategies, we hedge against the risk of rising interest rates. Both strategies were also impacted by yield spread widening that affected most sectors of the fixed income market during the third quarter. However, in our credit strategy, our credit hedges offset some of the impact of the widening, and on our Agency strategy, our pay-up increased during the period. Within our credit portfolio, it's important to note that while the spread widening that took place during the quarter dampened our results; its impact was in the form of unrealized losses. We were not in any way forced to sell asset and realize actual losses. This can be seen by the fact that we actually generated realized gains of $12.1 million or $0.35 per share, the majority of which came from our non-Agency RMBS portfolio which we continued to sell down in favor of the other asset classes that we've been rotating into. We also had a meaningful contribution to realized gains from our CLOs and non-performing residential and small balanced commercial mortgage loans. That said our legacy non-Agency RMBS still represents the largest component of our credit portfolio and therefore had still typically been generating most of our income. However during the third quarter, the yield spread widening that occurred, and the resulting unrealized losses that we recorded, led to a reduction in its overall contribution to our earnings relative to our other asset classes. Non-Agency RMBS contributed approximately $0.10 per share during the third quarter or approximately one-third of our total credit results. In comparison, last quarter, our non-Agency RMBS made up approximately 60% of our total credit results. Within our credit portfolio those asset classes which are less sensitive to movements in interest rates and the global macroeconomic environment include our consumer loans, our non-performing residential loans, and our small balance commercial loans. These three segments performed very well during the quarter and combined to generate income of approximately $4.4 million or $0.13 per share, an increase of approximately $1.1 million or $0.03 per share from the second quarter. They represent approximately 42% of our third quarter credit results. The remaining 25% of our credit results came from income from our CMBS, CLOs including European credit investments, our relative value trading strategies as partially offset by losses of interest rate swaps and unrealized losses on distressed debt investments. Over the third quarter, the size of our non-Agency RMBS portfolio declined by about $84 million, and it is now approximately 50% smaller than it was at the beginning of the year. As I mentioned earlier, our Agency RMBS strategy generated a gross loss of $1.8 million or $0.05 per share for the quarter. On a year-to-date basis, however this strategy has generated positive income of $5.8 million or $0.16 per share, based on allocated capital of approximately 18% it has generated a nine month return on equity of about 4.2% or about 5.6% on an annualized basis. This was achieved in spite of extremely volatile interest rates and widening yield spreads over the first nine months of 2015. Through active trading, we generated realized gains of $900,000 or $0.03 per share for the quarter, and $7.9 million or $0.23 per share for the nine months period. At the end of the third quarter, our total long credit portfolio was approximately $655 million, down from approximately $753 million in the second quarter, while our Agency portfolio was up slightly to $1.2 billion from $1.1 billion. Our debt to leverage ratio was up slightly relative to last quarter at 1.81 to 1 but remains lower than our historical norms as we have sold some of our legacy non-Agency RMBS holdings, our leverage ratio has declined. However as we continue to put additional repo and financing lines in place in connection with some of our other credit assets, we expect that over time our leverage ratio will increase. Our overall annualized net investment income, as a percentage of shareholders equity, was 9.2% for the quarter and we project that to continue to rise as we continue to realign our portfolio. Our expenses remain essentially on forecast and our annualized expense ratio for the quarter was 2.6%. We ended the quarter with a diluted book value per share of $22.22, down just 2.3% from that of June 30. Our diluted book value at September 30 includes the modest accretive impact of our share repurchase activity which began during the third quarter. I will now turn the presentation over to Mark.

[Mark Tecotzky:]

Thanks, Lisa. To begin, I will quickly go through the market backdrop for the quarter because at this point in the earnings cycle others has covered most of it already. During the third quarter, we got bad news about emerging economies, especially China, and what it previously been a fairly consensus view among market participants that the U.S. economy was strong enough to shove off this global weakening with challenge in September, when the Fed decided not to raise the target Federal funds rate. This set the market with the feeling that things would worsen in the U.S. than previously thought. It's more pessimistic view; was also reinforced by the weak September payroll report released in early October. Our portfolio was set up pretty well for all this. The real outperformers as to credit market widening were legacy structured products including non-Agency RMBS and legacy CLOs. Price movements in these sectors are actually quite muted and housing market fundamentals remain strong, while legacy CLOs back the outperformed newer vintages. Every market drawdown the past year showed a lower and lower data of legacy structured products to high yield corporate bonds and equity. We believe that going forward structured credit will continue to outperform. We managed to avoid the real losers for the quarter, high yield distressed debt, and CLO 2.0s. CMBS also widened during the quarter but we did not have a lot of CUSIP exposure and like many others in this space we had CMBS hedges in place. Many market participants are asking whether it's time to buy high yield aggressively but we are not convinced. The high yield market is becoming less and less liquid by the day and cash is decoupling from CDX. Our fear is that if redemption hit ETF or large distressed hedge funds price will drop further on supply. In Europe, however our views are little different. UK non-conforming loans, whose performance looks good, did materially drop some price during the third quarter, unlike U.S. non-Agency RMBS. So we think there is real buying opportunity in this asset class. This quarter there were no changes in expected cash flows, instead there were just lower prices. So expect that our going forward investments will have a higher yield or higher total return. Let's look at how the portfolio evolved in Slide 11. As you can see we are busy in the quarter. We shrunk the portfolio by almost $100 million, primarily signed CUSIP securities that performed well not only during the quarter but over a longer time horizon. We sold season non-Agency RMBS as well as both U.S. and European CLOs. All these sectors are relatively unscathed by the credit volatility in the quarter. In addition, we deployed cash from these sales and higher yielding sectors like consumer loans and distressed commercial loans. We have also been successful in securing some financing arrangements in some of these sectors. This is particularly important because it is precisely in these sectors where we are seeing an enormous spread between available asset yields and available financing cost. In some sectors, the yield gap between assets and funding can be 800 basis points. This is important because it should allow us to generate net income with just small amounts of leverage which as you know is how we like to run our portfolio. As volatile spreads were in Q3, we still haven't seen how the market is going to act to a Fed hike during a time of weak liquidity. So operating with low leverage is vital. Our plan was to raise cash by some sectors that trade spreads around approximately 300 over the yield curve and to try to reinvest the proceeds in sectors that we expect to provide double-digit yield. We also thought it would be prudent to sell assets in Q3 as opposed to trying to do so at the end of the year. So now we've raised cash on these asset sales and can be opportunistic coming into year-end. In general, the newer investments we've added are yielding substantially more than what we've sold. And with a little bit of leverage the yield pickup could be tremendous. Slide 12 shows how far we have come since the end of 2013. Our non-Agency RMBS portfolio is half what it used to be, and we now have a real presence in many higher yielding sectors, importantly our activities in consumer loans and commercial real estate are not easily replicated by others. So we believe that gives us the competitive advantage going forward. If you turn to Slide 14, you can see our credit hedging. They have a dual purpose. First, they hedge against a weaker credit environment; and second, they partially hedge against asset spread widening. Our credit hedge has helped us this quarter, post quarter end the high yield indices have bounced back up without cash bonds failing seen. We think there was a good reason to be concerned about high yield and leverage loans. There are lots of fundamental problems in the form of energy and commodity exposure and now that CLO issuance has slowed down there is supply issues as well. At new limit to CLOs had been the dominant source of demand for new leverage loans over the past few years. So we like how we're positioned with credit exposure to the U.S. consumer, U.S. residential real estate, and U.S. commercial real estate hedges short positions in high yield. On the Agency side, it was a tough quarter. Agency mortgages substantially underperformed swap hedges. We lost a little $0.05 a share. I think it's important to remember that when a loss is caused not by fundamental factors like a credit loss or faster realized prepayment it is a mark-to-market loss caused by an asset yield widening relative to its hedge those loss is going to reverse. At quarter end, Agency CMBS was substantially cheaper than they were earlier in the year and has performed well since quarter end. With that, I'll turn the call back to Larry.

[Larry Penn:]

Thanks, Mark. During the third quarter, we purchased our first batch of non-QM loans from one of the flow agreements we have in place. This included settlements on commitments that we made in the late in the second quarter. The ramp up business slowed than we had hoped but we are launching a bunch of new products and basically still just getting started. Some of the slow start was also just making sure that all the origination systems were integrated properly. And now that those were in place, our primary non-QM source and originator on which we are significant strategic investor, had significantly ramped up their non-QM sales force just in the past 30 days. So we expect to really see things get going in November and December. Our consumer loan portfolio is a key growth area for us. We continue to add to our portfolio under our flow agreements with originators. Our portfolio currently includes unsecured loans as well as auto loans. We have flow agreements in place with multiple originators and we're seeing lots of new opportunities in this area. We're very selective as to who we'll buy product from, what product we'll buy including underwriting guidelines and of course at what price. So we end up turning down lots of opportunities but at the same time, we've been able slowly but steadily to increase our roster of originators that are providing us consumer loan throughout. We have also arranged financing on many of our consumer loan and we expect to continue to expand our funding sources which would encompass most of our consumer loan flow going forward. So with yields on this product that are already high on an unleveraged basis, as you can see on page 13 of the presentation, on a leverage basis the yields are extremely attractive. Shifting gears, we've added two new slides this quarter to the presentation. Slides 29 and 30, coming after Slide 28, which shows our dividend and book value since our inception back in 2007 as a private company. Over the years, we've often talked about many of a factors that we believe make Ellington Financial's returns higher quality returns and about how as we achieve these returns, we try not to take too much risk in our overall portfolio management. The slides cover the entire period from Q1 2011 Ellington Financial's first full quarter as a public company. The end of the second quarter of 2015 which was the latest available data we had for the hybrid mortgage REITs. Specifically, we've often talked about how less leveraged Ellington Financial is than the mortgage REITs generally, how careful we are in our cash and liquidity management, how we can and do use substantial amounts of credit hedges to reduce risk, how we make such liberal use of TBA short position to manage basis and interest rate risk in our agency portfolio. And let's also not forget 2007and 2008 when as a 144A company, Ellington Financial broke even through the most difficult markets ever for structured credit while many mREITs at the time were crushed or even went bankrupt. Many of the mREITs around today weren't even in business back then. We're much more time tested in those companies to be sure. Well, Slides 29 and 30, speak to Ellington Financial's relative risk profile as it has impacted book value and economic return two key metrics in this space. Let's start with Slide 29. This slide shows the stability of our book value per share in relation to the hybrid mortgage REITs. Now obviously this doesn't include dividend which are as important a factor in economic return as book value and for economic return we're going to get there on the next slide, Slide 30. This Slide 29 speaks only to book value per share. Why is stability of book value per share important? It certainly reflects that your portfolio isn't experiencing wild swings in value from period to period. It shows that you're being good stewards of your shareholders capital by avoiding serious stock issuances at heavily dilutive levels. It also shows that over time your dividend is approximating your economic earnings. Now since every company sizes their shares differently, we have to normalize the graph to put every company on the same footing. So for Ellington Financial and the 14 hybrid mortgage REITs, we computed the average book value per share over the entire period for each company and then graphed for each company the deviation of each of its book values from its average book value. As you can see, Ellington Financial, the blue line popping out from all the grey lines representing the 14 hybrid mREITs clearly states the closest to the base line. And the statistics bare it out. As you can see on the table to the right of the graph, EFC has the lowest standard deviation of the entire group. Let's move on to slide 30. This slide shows the same 15 companies over the same time period. But this time we're graphing the cumulative compounded economic return that includes both dividends and changing book value or compounded of course. There is a twist however and it involves computing the Sharpe ratio which is why we consider the goal standard of performance evaluation in the investment industry. This will get a little tactical now, so I apologize. Instead of just using the raw quarterly economic returns for each company, in computing the Sharpe ratio, you scale up or down each company's quarterly return by the calculated risk of that return as measured by the standard deviation of all the quarterly returns over the period. And after doing that, you get the graph on the left of the slide and Ellington Financial, as represented again by the dark blue line, has the highest risk adjusted compounded returns. The Sharpe ratios which are on the table on the right represent the annualized compounded economic return for each company divided by the annualized standard deviation of that company's quarterly economic returns. So Ellington Financial have not had the highest absolute compounded economic return over the period, it has had by far the lowest volatility of its quarterly returns which helps Ellington Financial achieve the high Sharpe ratio basically the best returns per unit of risk. To conclude, I'd like to discuss our capital management strategy. As announced, our Board has set a new dividend level of $0.50 per share which is $0.15 lower than its previous levels. This is not reflective of any less confidence on our earnings power. In fact as we've discussed earlier throughout this call, thanks to all the better opportunities we're seeing in so many of the sectors where we've been adding and all the investment pipelines and sourcing capabilities we're building, we're as confident as ever about the earnings stream we're creating. We set our new dividend at a level commensurate with where we see our leverage to asset yields trending as we continue to realign our portfolio. We believe that once our portfolio realignment is complete, we will have established an earnings stream that will cover our new dividend level on a yield basis alone, even before taking into account our trading, that has historically enhanced our returns by hundreds of basis points. Now since we do mark-to-market through our income statement and since we're active traders, our actual earnings will necessarily continue to fluctuate from quarter-to-quarter. However it is our expectation that over time and over market cycles, we will generate earnings in excess of our dividend level. Down the road if our leveraged asset yields trend even higher and our mark-to-market earnings follow suit, we will consider raising the dividend level. Initially, we plan to use the entire difference from our prior distribution level that $0.15 per share per quarter or approximately $5 million per quarter to repurchase our shares. With our stock trading at such a significant discount to our assets, the values of which we are extremely confident, these share repurchases will be immediately accretive to book value and will amplify the earning power of our assets for our shareholders. And in addition to making discretionary repurchases during our open trading windows, we also plan to enter into a 10b5-1 plan to ensure that we have enough trading days to implement these repurchases. Ultimately, should our price to book ratio recover or other significant additions change, we will consider using this extra capital for other purposes appropriate such time such as increasing our investments in our most compelling asset classes or perhaps paying special dividends to the extent that our realized earnings substantially exceed the new dividend level. I hope you all agree that Slides 28, 29, and 30, demonstrate very clearly that over our history, we paid substantial dividends to shareholders, while at the same time maintaining stability of book value even through the most difficult of market environment. These remain core objectives for us. In fact at $0.50 per share per quarter, our new dividend level is still attractive by almost any metric representing a 9% yield based on our $22.22 book value per share as of September 30, and representing slightly over 11% yield based on our November 4, closing price of $18.07. That said while we recognize that some shareholders might prefer 100% payout ratio, we also believe that it's important for us to be more focused on long-term value creation and the use of our earnings, whether in repurchase of our shares, when they're trading at distressed levels of whether to build book value over time through retained earnings. To succeed, we recognize that first and foremost, we must continue to manage our investment portfolio and enhance our sourcing abilities to take advantage of the best opportunities for high risk adjusted yields and the potential for growth in building a franchise value. However we also believe that this refined capital management strategy is an important step in achieving our goal, which as always is to maximize long-term value for our shareholders. Please remember management owns over 10% of Ellington Financial. We are aligned with you and we want to create long-term value for you. This concludes our prepared remarks. We're now pleased to take your questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Steve DeLaney with JMP Securities. Steven DeLaney And Larry, I thought the just to add to the Slides 29 and 30 just offer that at this point in the earnings season, we're calculating that EFC was one of just three of the 14 hybrid REITS that did have a positive total economic return in the third quarter, so tough quarter but congratulations on being plus half a percent. I was really struck in the remarks, both yours and -- your remarks and Mark Tecotzky's, the amount of focus within EFC, currently on non-CUSIP investments and specifically, your remarks about the n-QMs could you comment a little more about how you plan to finance the n-QM whole loans and with the range of targeted return expectations would be on that product. Thanks. Larry Penn Sure, so the financing strategies for non-QM is two pronged. First we're going to work with private lenders who as we discussed, I think on earlier calls, are was there not as eager the big banks to lend under Agency repo because of the new capital rules, on non-Agency and certainly something like non-QM where they can earn a very healthy spread, they get a great return on equity for doing that. So I think we'll be able to finance and we're working on right now one line, this product the non-QM product with banks, now that's going to be a, pretty high cost to funds obviously in line may be even slightly higher that what we see on our lower credit quality CUSIPs that we finance. But the other initiative that we have in place is Federal Home Loan Bank membership and that is continuing a pace. We hope to get that done. Our target date is January. And there we believe that we'll be able to get very attractive financing on a number of our asset classes including non-QM and the funding levels there, as you probably know, are [indiscernible]. So that's our strategy there and the leverage returns using the private funding will be certainly very good but so if we can originate products say around 7% yield for example and finance that somewhere in the LIBOR plus 300 plus territory that already gets us to our target return on equity levels but with Home Loan Bank financing in place, it would be just a quantum leap forward from there. Steven DeLaney Got it and you're obviously designing products in terms of CFPB rules ability to repay et cetera that you think are developing a product that would not be viewed as toxic or predatory in the eyes of the Home Loan Bank. I would think they would be pretty picky about what types? Larry Penn Absolutely, yes where you did say certainly something that we're not going to mess around with, and it's a -- there are two sides of the coin right, there is the three sides really like you said there is the regulatory side and but there is also the demand from the consumer side right in addition to what we're looking again, we also are have been working with our product mix, working with our partners here to find different products that can gain traction amongst consumers. Steven DeLaney Got it. Great, thank you for that. Larry Penn Thanks. Steven DeLaney And just one final thing over the last year, you guys have been pretty creative and making strategic opportunistic investments and then based on your comments of value creation, seeing value in your own shares, you're trading about 80% of book, there is a lot of mortgage REITs out there that are well below that. So I'm just curious if you would see investing in the equities of some other selective mortgage REITs may be 70%, 60% of book if you would view that as a responsible allocation to capital, want to track this? Okay. Larry Penn Yes, we do it a little bit, it's a long short strategy, Mark, actually oversees that strategy as well. And so we do it, it’s not a big part of what we do, we think that those companies are obviously like you say trading in a low price to book ratio but we want to play things more in a long short basis and we have limited capital and we want to deploy it much of it as possible in the areas where we see the future basically coming down the road these pipelines and the stuff that we’ve been rotating into. So I think it will continue to be a small piece of what we do and we will be opportunistic about it but I wouldn't expect it to be a major part of our strategies.

[Operator:]

Our next question comes from the line of Sam Choe with Credit Suisse. Doug Harter Hi, it’s actually Doug Harter. I was just wondering if you could help us understand possibly how big the opportunity is and whether it’s the consumer loans or some of these non-QMs just sort of can get a sense of how scalable these investment opportunities are. Larry Penn Yes, so in non-QM, I would say that it's untested right where we and others are out there and we believe that this is a market where there is going to be a lot of demand from the consumer and that obviously we have demand as well, it's been slow. But if you look at the origination numbers and we’re still in a low interest rate environment just getting a small percentage of that is big numbers for our company of our size. Mark, I know you want to add to that? Mark Tecotzky Yes, hi Doug. So our thinking with non-QM is we’re fortunate enough to partner with a team that is very baffled about credit and if you think about the mortgage market pre-crisis, pre-crisis less than 50% of the loans were going to Fannie, Freddie, Ginnie with more than 50% were going, were coming to market and we're not getting a government guarantee on them. So for very small investment we’re able to partner with a really strong team to get out in that space. I think we viewed that as a great opportunity to, great option value for Ellington Financial; we’re starting to get loans in. The loans we’re getting in, look like very attractive it’s still small may be it will be small for year or so but when that market evolves right, we now have a company in place, a program in place, and it can be very meaningful some point down the future, I think it’s just hard to sort of pin it down. Doug Harter So I guess along those lines how much revenue advantage, do you think it is to kind of be a first mover or to be in position today when may be the opportunity isn’t there or yet the size isn’t there yet but to be in position borrower a year or two years from now? Larry Penn I think it depends on the burn rate of the business right. So for us we made a very small investment on the order of a few million dollars. We have been very parsimonious with how money is spent in that company. So we’re looking to have a seat at the table and be profitable without having spent a lot of cash. I think that’s the key, if you told me you got to get into these businesses and you got to think millions of dollars into them before you know if it’s ever going to amount anything, I feel very differently about it. But to partner with thoughtful credit people, to have an investment that cost almost nothing to run, I think it’s a great opportunity for us.

[Operator:]

Our next question comes from the line of Mike Widner with KBW. Mike Widner So let me follow-up just to make sure I understand towards the nuances of the changed dividend policy or I think as you call it sort of your capital management policies. So I guess I just want to make sure I understand a couple of different statements you made the prior dividends $0.65 or so, you said you don't necessarily – because of the reduced dividend doesn’t necessarily imply reduced earnings power and you expect that earnings power to continue. And so I just want to make sure how to think about that on like a per share basis or I guess the -- I will just stop there for a minute? Larry Penn Yes, so, we still think that we had signed $0.65 a share with the Board obviously as where we saw our earnings trending with the portfolio alignment already completed right and it may take a couple of quarters for us to get there. So what this $0.50 dividend level implies with that earnings projection is less than a 100% payout ratio. So that's one fundamental change right to our capital management strategy. However at the same time, we want to be opportunistic and we see that our stock is trading at times in the low 80% of book, and we want to use that extra capital that’s been freed up by this lower payout ratio to buy back stock and to buyback at these levels which is accretive to the company and I don't have to repeat all the reasons why that’s a great use of our capital. The $0.50 level, why $0.50, so what we’re looking at is we’re looking at, Lisa talked about our net investment income projected to rise over time, we look at where our yields are trending. We look at what kind of leverage we’re getting now on those assets and where we’re going to be getting the future as we get for example these consumer loan financing arrangements as we’re looking at getting closer to financing our discretional balanced commercial loans. There are lots of things going on but we see our leverage to asset yields increasing. And what our goal is basically is to size our dividend at a rate where just the leverage to asset yield will cover the dividend. And then the other ways that we make money at Ellington Financial have historically over time step to rotation, active trading, things like that, that should just kind of be the gravy that will get us to say hopefully the $0.65 level or higher. But that’s how we're thinking about the dividend in terms of sizing and now, as you know when we recycle the dividend we own -- we tend not to change it every quarter, something changes we will change it right. Well but we want to be opportunistic, we want to look at where our leverage asset yields are but we also want to see where the opportunities are either to buy back stock like there is a great opportunity now that may not last forever, to invest in certain businesses or asset classes that we think are tremendous, there will be another use to pay a special dividend. I mean we have lots of flexibility with our structure right we’re not a REIT, we're a PTP, so we have that flexibility. Mike Widner Right. And so if I was going to put, I mean just using your current share count in those numbers, I mean that implies $22-ish million, $0.65 dividend implies a $22-ish million earnings rate is $0.50 dividends basically $5 million less than that. And I think you mentioned that in the prepared remarks but all of the equal stock continued to trade here that would suggest buying back $5 million worth of stock. Larry Penn That’s right, that’s exactly right. Yes, and we realized that we’re going to be judged by our actions not by our words. Mike Widner Right. So well hopefully it starts trading back to book by the time the call ends and you don’t have to worry about that. So I mean next sort of follow-up is, I mean that’s the commitment that sort of makes a ton of sense I think hopefully to investors but like you said sooner or later may be the stock is trading higher and so you guys had long, had a dividend policy where you did target a 100% payout and then you sort of true up at the end of the year with a special if whatever, so. Larry Penn That’s right, so this is a slight shift that’s right. Mike Widner Okay. So it’s -- so you’re not so even with the share repurchases and everything right, if the stock price goes back up to a point where share repurchases are no longer economical, we don’t necessarily count on the special dividend that would be you guys are just going to reinvest that capital that you don’t pay out in what I think you’re saying you would anticipate being ROE accretive or EPS accretive way. Larry Penn Exactly. If our stock price is not in a place where that makes sense to use it to repurchase stock, then right we would look at it for other purposes. Now that said if we really like I said, if we really far substantially exceeded the dividend, if earnings substantially exceeded, then I think we will consider special but again not to get to 100% payout ratio. Mike Widner Got it, makes sense. And then I guess just the last one I mean, I know this isn’t really I’m not trying to pin you down towards specific guidance number but what I think you were saying is that and this is where I want you to tell me if I’m wrong that earnings power is a portfolio normalized or stabilized in transitions. I think you’re suggesting that kind of just a pure net spread, less operating expense parts is sort of 50-ish, low-50s kind of cent range is that you’re saying and then? Larry Penn Yes, at least, I mean you look at the net investment income number that Lisa quoted yes, so unleased that is right. And we see that getting better but we want to be conservative. Mike Widner Because I get same answers and while I guess I’m not sure what the transitioning is, but I mean I think at least states that my numbers I mean you are kind of already there now. Larry Penn That’s yes I think that's what I just have, that's right. Mike Widner And I thought so. I let you guys might be misreading something, like always I appreciate it. And I think like what Steve said I mean nice job on the quarter and it was a tough quarter and you guys still seem to be working the magic. So congrats on another solid quarter. Larry Penn Thank you.

[Operator:]

Our next question comes from the line of Lee Cooperman with Omega Advisors. Lee Cooperman Larry, let me compliment, I think your presentation is quite comprehensive, I might not be happy about the price of stock but I think your presentation is quite comprehensive and this should be complimented. I just wanted to have -- like make an observation first a question. Given the way you intend to manage the company going forward in terms of the amount of leverage you chose to employ what do you think a reasonable return on equity would be over a cycle, if you have to make a guess. I understand presently the dividends of 2% return, 11% return on market, 9% return on book but over a cycle, you guys have reviewed what you think you could generate in the way of ROE? Larry Penn Yes, I think around 12%. Lee Cooperman 12%, okay. In my opinion 12% ROE in today’s world it could change if interest rates change dramatically, but would commend something around book value as a reasonable price. And the only issue I take with you -- it may or may not wrong but $5 million a quarter, just $20 million a year is a little bit of a 3% of the market cap, if I own 10% of the company and I could buy something an 80% or less than book value and still I could earn 12% of book, I bought more than 3% a year back. So I would just encourage you to be flexible and open-minded, one of these days will get into a bear market then who knows where stocks would trade but we should be attuned to taking advantage of it. Larry Penn And I appreciate that totally agree. I think we’re right now at a level in the low 80s where I think I mean we even on our call that we had at some point in the past, you suggested that maybe that wasn’t even the most compelling entry point in terms of buying back stock. But we’re going to be buying back stocks even at this level. If it is goes much lower than that absolutely that could be very appropriate for us to ramp that up higher. Lee Cooperman Again I want to compliment that is a very comprehensive presentation. Larry Penn Thank you, Lee. That means a lot coming from you.

[Operator:]

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