Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Ellington Financial First Quarter 2020 Earnings Conference Call. Today's call is being recorded. [Operator Instructions]. It is now my pleasure to turn the call over to Jason Frank, Deputy General Counsel and Secretary. Sir, you may begin.

Thank you. Before we start, I would like to remind everyone that certain statements made during the 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 13, 2020. 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 am joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our Co-Chief Investment Officer of EFC; and JR Herlihy, Chief Financial Officer of EFC. As described in our earnings press release, our first quarter earnings conference call presentation is available on our website, ellingtonfinancial.com. Management's prepared remarks will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes at the back of the presentation. With that, I will now turn the call over to Larry.

Thanks, Jay [ph]. And good morning, everyone. As always, thank you for your time and interest in Ellington Financial. After a quiet start to the year, the COVID-19 pandemic and the associated measures to contain the pandemic brought the global economy to a virtual standstill in March, which resulted in extreme volatility and widespread market dislocations, including a collapse of asset values and liquidity. Economic activity plunged as countries around the world implemented social distancing restrictions, unemployment claims surged, consumer spending plummeted, and GDP growth rates turned negative. In March, equity sold off across the globe as the 11 year bull market ended in spectacular fashion. Yield spreads on most fixed income assets widened sharply and a flight to safety drove record low yields on long term U.S. Treasuries. Portions of the yield curve inverted and the interest rate volatility surged. On Slide 3, you can see the extraordinary quarter-over-quarter declines in treasury yields. Repo financing stresses alongside a drop in asset prices severely reduced liquidity and prompted for selling across virtually all credit sensitive fixed income asset classes. Many leveraged mortgage investors in response to margin calls from the lenders had to unwind portfolios quickly at inopportune times and their fire sale prices. While at the same time, many mutual funds and ETFs that offer daily liquidity also had to sell urgently in their case to meet mounting investor redemption requests. A vicious cycle ensued as these four sales put additional pressure on prices which prompted further stress and liquidations and so on. The selling pressure extended even to perceived safe havens like agency RMBS, where yield spreads skyrocketed to levels not seen since the 2008-2009 financial crisis. The downward spiral finally started to subside, though it didn't end right away when the Federal Reserve stepped in to restore…

Thanks, Larry. And good morning, everyone. Please turn to Slide 7 for a summary of our income statement. For the quarter ended March 31st, EFC reported a net loss of $3.04 per common share, compared to the net income of $0.31 per share for the fourth quarter of 2019. Core earnings for the first quarter was $0.46 per share up from $0.44 per share in the fourth quarter of 2019 and covered the common stock dividends declared during the first quarter of $0.45 per share. While total net interest income increased 24% sequentially and gains on our credit hedges were meaningful, the significant net loss for the quarter was driven by losses on our long investment portfolio as the market dislocation in March led to wider yield spreads across virtually all asset classes. Next, please turn to Slide 8 for the attribution of earnings between our credit and agency strategies. During the first quarter, the credit strategy generated a total gross loss of $2.47 per share, while the agency strategy generated a total gross loss of $0.38 per share. These compared to gross income of $0.28 per share in the credit strategy and $0.32 per share in the agency strategy in the prior quarter. Most of our credit strategies generated net losses during the quarter. The largest losses occurred in CLOS, CMBS, non-agency RMBS and non-QM loans, all markets where there was substantial distress selling during the quarter. Our long strategies with shorter durations had better performance, including small balance commercial mortgage loans, consumer loans, and residential transition loans where we received significant proceeds from principle payments. And in the case of small balance commercial mortgage loans, several profitable asset resolutions. The fact that most of our commercial mortgage loans have LIBOR floors was also valuable in the quarter as…

Thank you, JR. The markets for securitized products in the second half of March and throughout much of April, were as challenging as I've ever seen in my career, including even 2008. Larry already gave some of the blow by blow. So I won't repeat it all now. But essentially COVID-19 created such a sudden and dramatic change to the outlook for U.S. economic growth and employment that almost overnight, both lenders and investors, repriced virtually all credit assets, to both much higher yields and much higher loss expectations, setting off a wave for selling for mutual funds REITs and hedge funds. If you had a portfolio that was highly leveraged, even with senior assets or if you had a portfolio that was only modestly leveraged, but with subordinated bonds. Either way, your balance sheet was under siege. And if you became a forced seller, the prices you realized were quite distressed. The policy response from the Fed was fast and enormous, massive buying of agency MBLs, health programs lending program and the CARES Act all went a long way toward stabilizing the market. As we see it, the two big beneficiaries from the government intervention are the consumer and the residential housing market, which are both sectors we have long favored Ellington Financial with its diversified less leveraged portfolio, which included lots of liquid agency assets, and which in credit included a concentration of lower LTV loans, was able to weather the storm. While we absolutely have worked through resolving assets, where either the borrower or the property are experiencing a loss of income we are pleased with the performance of most parts of our portfolio. And while the agency CMBS market did not escape unscathed, our disciplined approach kept our net loss our agency portfolio under 10% on…

Thanks, Mark. While an economic return of negative 60% for a quarter is painful to say the least. I'm extremely proud of how our team managed through the unprecedented challenges of the quarter, especially given that leveraged credit portfolios were in the crosshairs of the distress in the financial markets. Our liquidity management, risk management and hedges did what they're designed to do. They protected book value, and they protected our shareholders. This past quarter that meant protecting our shareholders, not only by avoiding any forced asset sales, but it also meant protecting our shareholders by avoiding any expensive or highly dilutive capital raises. In addition to our GAAP loss for the quarter, we also estimate a taxable loss for the period. For read purposes, a first quarter taxable loss would technically lower our distribution requirement for the full year. The board has set the two most recently announced dividends at $0.08 per share. While our outlook for future core earnings for Ellington Financial is strong, these reduced dividend levels balance that optimistic outlook on core earnings against our now ease of distribution requirement and our desire to preserve liquidity. Liquidity both to take advantage of investment opportunities and liquidity just to be prudent in these continued uncertain times. The board will continue to assess the dividend rate on an ongoing basis as market conditions and our financial position continue to evolve. Financial crisis can also create opportunities. And as we look ahead, the diversified credit sensitive sectors, which Ellington Financial has deep experience, particularly in many of our loan businesses are facing a severe supply demand imbalance with net interest margins that are as wide as we've seen in years. We believe that this imbalance will present highly attractive asset acquisition opportunities for Ellington Financial for some time to…

[Operator Instructions] Your first question comes from the line of Trevor Cranston with JMP Securities.

Hi guys. Thanks. Hope you guys are doing well.

Thanks. You too.

Couple of questions on the financing side. You guys talked about the uncertainty that there remains about the terms and availability of financing for new asset purchases. I was wondering if you could talk about, how much of the credit repo you guys have was actually rolled between sort of the middle of March and today and a repo that hasn't yet rolled to sort of what your level of confidence is that the lenders are going to be continuing to be willing to finance the assets going forward. Thanks.

Yes. I don't want -- first of all, I don't have obviously all those figures at our fingertips. But I can tell you that, we're feeling good. We did extend actually some repo, as I think I mentioned, we not just stagger maturities, but we also roll kind of ahead in advance of repo maturities, not just waiting till the last minute to roll a repo. So we did take some proactive steps. I'm not going to be too specific with which counterparties and in which markets, but there was some significant credit repo that we actually extended well in advance of August maturity during March. After quarter end, we've also significantly extended some other very large amounts of our loan. I'm talking now about our loan repo, which is perhaps what you were focusing on. In securities, I would say that, the situation is definitely clearer and that securities repo, I don't want to say that it's been business as usual, but we really have not had significant issues rolling securities repo. Loan repo, again, we've been ahead of the game staying ahead of the game. But the availability in terms exactly what we're going to see in the future. Well, let's just take non-QM for example. So we have some nice term repo on non-QM right now. So we've got -- we think ample runway there. But nobody can predict exactly where that repo market is going to settle in, and it's going to be related to the securitization market as well. So there's still non-QM out there in the marketplace sitting online waiting securitization. And there've been some distressed sales, as you may or may not have heard about, especially in March. So we have to see how that will play out. And that's going to affect the rates that the non-QM borrowers are going to pay. It all sort of is a cycle, if you will. So again to summarize on the loan side, I think we've been very proactive about that even during the depths of the crisis. It's going to be more expensive to finance loans, there's no question about it. But the rates that we're going to be able to get from borrowers, the yields we're going to be able to earn on our loans are going to be significantly higher. So we think that all told this is going to be a great opportunity talked about that supply demand imbalance between borrowers and lenders. So I hope that answers your question.

Yeah, that was very helpful. Thank you for that. And then, next question. Mark talked a little bit about sort of the differentiation in the types of price movements among assets like some where you do expect a meaningful change in the actual cash flows and credit performance in some assets where there isn't necessarily so bigger change. I guess, as some liquidity returns to the credit markets. How are you guys thinking about the composition of the portfolio? Are there certain sectors where you might like to sell assets to the extent you feel that you can do that and reallocate into something else? Or how should we think about the mix of the asset classes?

Yeah, let me take that question first. And then I'm going to pass it to Mark. Because I'm sure he's going to want to supplement. So during March, especially the markets were so illiquid for credit product that rotation wasn't really an option. It was reversing the bids that asked spread was just too expensive. Going forward, I think you're right on. Now, we're always though going to have to look at what are we selling versus what are we buying or what are we reallocating. And so what I would say is that, I think that when you -- when we think about Ellington Financial and what kind of company it is, and how the market in the past has rewarded us for building the types of sustainable core earnings for example. And I think so I do believe that as the year progresses, we will at the right time, sell certain of our securities portfolios when, again, we think that it makes sense on a relative value basis. And redeploy, more into some of these asset classes where I think the supply demand imbalance is going to be more sustained. There's currently supply demand imbalance still in a lot of securities markets, right? Even non-agency RMBS which was the star performer right after the financial crisis of 2008-2009. And which is obviously a much smaller market than it was back then. Even that market, is trading at very wide level. So we're not saying that we're just going to be selling things right away. But as those markets continue to fall, which we believe they will as the security markets continue to fall and as more clarity comes to the market we will absolutely be looking at rotating out of some of those -- I'll just call them more non-core assets for us at this point. And getting good total returns. Making sure that we are selling at the right time. And redeploying probably into more of a loan businesses where we think that the opportunity is going to be sustainable really for a long time. So we want to build those businesses there. Mark, is there anything you want to supplement?

I guess I would just say that our interest is in sectors where the outcomes aren't binary. And the outcomes aren't contingent upon guessing right on potential policy moves. So if we think about hotels or we think about student housing the outcomes and those kind of loans are highly dependent on when the economy reopens once reopens what consumer psychology is, when universities reopen. And so I think we have a great research effort here supported by vast amounts of data that we purchase. But that effort in that data doesn't give us an edge in predicting the sort of things that are going to drive outcomes for those two sectors. But I think it is very good in understanding for different levels of unemployment. What income loss is, how the CARES Act and more generous unemployment benefits, offset income loss. And translating all that into what might happen with home prices. And so I'd say sectors where the outcomes aren't binary and it's not really contingent upon getting the policy response right. And sort of where we think not only do you get very attractive yields, but your downside is much more limited.

Okay, great. That's helpful. And then you guys talked about the amount of principal repayments you've had in March, which is obviously very helpful to have during that time period. Is there any way you can provide sort of an estimate of what your expectation would be for the average amount of monthly principal repayments looking forward?

Unfortunately, I don't think that's something that we can provide with enough confidence. The portfolio is whether it would be our small balance commercial portfolio or residential transition loan portfolio. Those are less statistical, right, those are more individual loan based. And certainly hard to predict. Even in during, times of stability pre-COVID those were hard to predict. But the maturities are short, right. So we're certainly hopeful that we will still have a steady stream of repayments there. In terms of the more statistical parts of our portfolio whether that be consumer loans, long term loans, etcetera. Mark, I don't know, if you want to say, I don't think we can be too quantitative, but if there's something anything qualitative, you could say that that those portfolios. They are -- we probably have -- we have a little more data. And again, I think we remarked on the call that so far we're very pleased with how those, continue to pay down. Mark anything you want to add there?

There's always -- there's two factors. One is that the portfolio some of the sectors, say like, RTL, is smaller now than what it was two months ago. So just because it's smaller, there, I would expect probably slowdown in repayments. And also two as I said on the call we're going to have headaches to work through. And so as some of the easier loans to resolve pay off than on a percentage basis, the headaches are a little bit higher percentage, this will be those reasons I expect it to come down a little bit. But there's also things like consumer loan portfolios, just fair bit of just straight amortization. So if the portfolio were to just stay where it is, and without substantial new purchases, I expect it to come down a little bit overtime.

Okay, got you. And then, just the last question for me. You guys talked about, focusing on the sort of core businesses going forward, along with origination partners. Of the investments you've made in the origination companies so far can you comment on how those companies are broadly faring and how they were able to come through the March and April time period? If they're still reasonably healthy and continuing to operate or what their status is?

Yes, I don't think we're going to get into too many specifics here. I think that our -- as you may know, our primary investment in terms of equity investment is in a reverse mortgage originator. We think that there's tremendous demand for that product now. It's an agency product, I mean, there's private label as well as demand for both. And so in terms of the ability to securitize that there's no question there. And it's a product where, as you can imagine the opportunity to basically borrow money with no requirement to make monthly payments, thereafter is looking quite attractive right now for people. So we feel very optimistic about that business. Our other investments are much smaller, in terms of our investment in LendSure. Again we’ve talked about how the non-QM market I think we said -- Mark said it a couple times, we’re getting ready, we’re planning to get out there again and start seeing where the right balance is between no rates that will be attractive to borrowers and will work for us after leverage whether to be after repo leverage or after securitization leverage. So we think that the competition in both of those spaces has been severely hobbled. I mean, I think there's no question there. And so we're again, very optimistic about the opportunities in that market. I'll just leave it at that.

Okay. I appreciate the comments. Thank you, guys.

Your next question comes from the line of Crispin Love, with Piper Sandler.

Good morning guys. Hope you're doing well and staying safe.

Yes, thank you, Crispin. You too.

Thank you. Can you talk a little bit at some of the at risk areas that you might have in your portfolio right now. I guess first what percent of your loans are currently in forbearance and then also what percent of loans are in certain sectors, whether it's retail, hotels, restaurants, small business loans or kind of any other areas you'd like to point out?

Yeah. We have not historically given that type of transparency on the commercial side, commercial mortgage side, it's diversified. So we have exposure in all sectors. And obviously some of those sectors like hotel and lodging are going to be at least in the short term certainly more challenged than others, like multifamily, but it's diversified. In terms of the actual figures on what's in forbearance and all that. Again, I think all we can say is that when we put out our Q, which you'll see, as JR said, we're going to put that out probably a couple of weeks later than we might have otherwise without the SEC release, so we can take our time. You'll see some information there. And you'll see also information in the valuations, right. And as Mark said, there were two components to the evaluations. And some of those are just yield spread widening and some of that will be disclosed in the Q. And there'll be some of it due to a kind of projected future credit impairments. But we're not -- but like up-to-date information about what's in forbearance right now, et cetera. I'm sorry, but we're not providing that. But it's, we do believe, but I will say that we do believe, and I think we implied that for example, in non-QM in RTL certainly. We believe, there's no old man act to go to for me to prove this, but we believe anecdotally based upon what we've seen and what we've seen reported to us, that our portfolios are holding up very well relative to those sectors at large.

Okay. That's helpful. One last one for me. What are your views on buying back shares right now? Are you more focused on preserving liquidity to buy other assets or do you see a good opportunity here to be buying back with the stock? I think it's around 70% of book. I know in the past you've talked about the 80% to 85% level as a threshold, but definitely different times here. Just sort of curious about what your focus is right now, whether it's buying back or investing elsewhere any color?

Yes, that's a great question. It is one that is -- you're right, pre-crisis 80% was kind of a level that made sense. And we are trading lower than that. Obviously we just put out book value. But our threshold now will be lower. I don't want to again, predict exactly how much lower it will be. And our window obviously for, well maybe not obviously, but our window for repurchases typically opens after we've had these calls. We also have to consider whether we have a Q coming out with more information as well. So we haven't made any decisions yet as to whether we'll be restarting our repurchases. But the threshold has to be higher because the investment opportunities are so considerable right now. And it's a lot different when you're buying back at 80% of book when the credit markets are pretty frothy versus now. So that's something that we'll be looking at very closely and trying to be a scientific about it as we can. And at the same time liquidity preservation I think I mentioned is always going to be a balancing factor as well. Just like, we lowered the dividend, but we did lower it to zero. It's going to be a balancing act. And I'm sorry I can't get more visibility there other than to say that I'm sure the threshold will be lower than it was before.

Okay. Thanks for taking my questions.

Your next question comes from the line of Doug Harter with Crédit Suisse.

Hey guys, this is actually Josh on for Doug. Thanks for taking the questions first on the agency portfolio, seems like a great source of liquidity for you guys in the first quarter. Curious how you're thinking about that portfolio going forward. And if you could just talk a little bit about how you're thinking about the agency strategy in general fitting into the broader portfolio mix of the company? Thanks.

Mark?

Sure. So you know, I mentioned in my prepared remarks that there is a real benefit to having that balance between the agency portfolio and a credit portfolio for you really saw it in this quarter, right? The agency portfolio provides a lot of liquidity at times when the credit market can be less liquid. And the other benefit I mentioned in the prepared remarks is that it's really only agency MBS and to a lesser extent, agency CMBS benefit from direct Fed buying at a time of real stress. And you saw that in Q1 and we availed ourselves that opportunity. And I think it was a thoughtful way for us to manage the portfolio. So historically if you take the longer view of how Ellington Financial has partitioned capital between agency and credit, it's typically been somewhere between the low end 15% of our capital and agency strategy up at the high end, maybe 23% 24% in an agency strategy. So I don't see those guardrails, changing that dramatically. I will say that now you have seen really if you include April a pretty material performance reversal in the agency market. So initially you saw TBAs turnaround and rebound from the substantial widening in March to very strong performance once the Fed started buying. We took advantage of that. And sort of the next leg of agency performance which you saw in April. And the new ones in the first week of May is very, very strong performance of specified pools relative to TBA. So with both those legs of agency performance, the TBAs versus swaps, and then the pools versus TBA having recovered a lot of ground from the wide levels of second half of March. The agency market to our way of looking at things is still a very attractive ROE. But its recovery has preceded a recovery we think is likely to happen should the economy reopen on sort of the projected path that you can see in the credit markets. I'd say right now I don't see us being in a rush to rebuild the agency portfolio back to the size it was pre-COVID. But, over the long route view, I think we'll get back to sort of the capital ranges that we've seen historically for EFC. And it still provides, even given the recovery of what you've seen through May, very meaningful ROE. It does have that distressed component to it, that you can see in some of the credit sectors where you can get not only capture potentially very high yield, but also capture additional total return should asset prices on the credit side retrace some of the precipitous decline you saw in March and April.

And if I could just add. No, that was great remark. Thanks. If I could just add, just keep in mind that we have those extra levers of how much we dial up and down our TBA shorts against our specified pools. And even whether we want to replace the specified pools with TBA loss. So we have those extra levers, especially on the TBA short side that really I think makes Ellington Financial and Ellington Residential stand out in the marketplace the extent to which we can vary those levers. So for example, and look, things continue to move around a lot, right. As Mark said, OAS is as wide as they've ever gotten since the financial crisis. And then, if you look at some of the material we provided, you can see that OAS has by some measures got incredibly tight on agency pools when you got to the end of the month. So these things are still moving around a lot. If we see an opportunity in specified pools, where we can buy stuff at extremely low pay ups and hedge with TBAs even if the overall agency RMBS market is tight at that point, perhaps because volatility is high, for example and the market is not adequately taken into account. These are trades that we can put on their necessarily take a lot of capital. But I agree wholeheartedly with Mark that longer term we see the more extraordinary opportunities on the credit side.

Great, appreciate the details, guys. Thank you.

Your next question comes from the line of Eric Hagen with KBW.

Hey, good morning, guys. Just following up on some of the commentary here. I mean, I guess we heard about some firming up in the market over the last couple weeks on the credit side and inspect pools to your point has done very well relative to TBA. I mean any detail on what drove the book value a little weaker in April? And then within the unrealized loss bucket, where do you guys think things are most likely to bounce back on some sort of recovery? Thanks.

JR, do you want to take that one?

Sure. So in the unrealized part, a significant portion of that is the application of CECL this quarter actually. So I mentioned in the earnings script that for EFC it was mainly a nonevent, because we've always valued our portfolio to the income statement. And CECL is I think, more designed for companies that don't do that. So part of the impact of CECL is that expected credit losses are appearing and unrealized rather than realized as they would have previously with impairments. I think that we have talked about in the earnings release and in the script, comments prepared remarks this morning that some of these sectors we expect to incur losses overtime, some of them we don't. I don't know if, Mark, you want to get into more specifics, I think we mentioned that CLOs and CMBS have lagged in the in the recovery, partly for technical reasons with the Fed purchasing other sectors and not those. But I think those would probably expect some credit impairments over time. Mark, if you want to elaborate on those points?

Yes, those were certainly the sectors. I guess our expectation is and this will change as we get new information that the default cycle you're going to see in commercial real estate is going to be a little bit more attenuated and will take a little bit more trying to sort through than what we currently expect to see in the residential market. And I do think that if you is partially informs pricing on some of those assets, so what’s interesting and if you look at some of the CMBS indices which are the function like the old ABX indices, right, where they referenced the different trenches on a basket of CMBS conduit deals. Certain sectors of those indices are as low now as if they were in the depths of March. And if you look on sort of residential non-agency securities, I don't think there's any sectors that are trading now where they were in March. So I think that well we expect great opportunities on the commercial side. And it's been historically one of the highest ROE sectors for EFC. There's going to be a little bit more unpredictability there. If you think about retail, you think about hotels, student housing. And I think that unpredictability is factored into prices right now. But I think that unpredictability is going to create some fantastic opportunities. So if you ask me, where do you think going to be the best opportunities to deploy a marginal dollar three months from now, it may well be in some part of the commercial real estate world, either loans with CMBS Securities. But it was the commercial side and CLOs that were the detracted somewhat from our April performance.

Yes. And I think just to add on April. I mean, of course it's just one month. But we also had sold down about half of our agency book during March. So we didn't get the same pop on the agency recoveries we otherwise would have, especially with specified pool pay ups. Another point, an important one is we had much larger cash holdings going into quarter end than we typically have for obvious reasons. We had delevered and built up our liquidity. So that gives us dry powder going forward. It helps us balance playing offense with playing defense, as Larry mentioned in his remarks. We think it's the right place to be. So I'd encourage you to, it's just a month and we'll kind of give you via continue to give the updates as we go along.

And I was just -- sorry, I just want to add one more thing, which is you've seen, just to amplify what JR just said. You've seen the agency, some of the agency mortgage REITs that have reported in April and book value per share. You've seen some pretty big increases right there. So that sort of follows on JRs point about how our agency portfolio is noticeably smaller than it was before. So we didn't get that same pop, plus of course it was always a smaller part of our capital allocation for a long time now. The other thing I just want to mention is that there are some markets, for example, non-agency RMBS, which I mentioned before, which were clearly very distressed in March. And a lot of that was, we mentioned, I think I mentioned the mutual funds selling for example that really exacerbated that. So you had extreme distress in March. And you had a, I mean, they're still cheap. And one of the sectors that certainly we think could be attractive, from a total return perspective and earnings perspective. But that's going to be a more short lived opportunity perhaps. But the valuations on that at the end of April clearly higher than at the end of March. A lot of other sectors and especially our loan books, just until we get more visibility, we're not going to be just marking that book up just because we feel better. So I think that there's -- yes, I think that explains a lot of it as well, in addition to some of the sectors that Mark and JR mentioned.

That was helpful color. Thank you.

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

Hey, good afternoon, guys. Hope you're all doing well. And thanks for taking my question. And just have a quick one since most have been asked. I know you've meaningfully reduced your non-REIT compliant strategies over the past year. But just curious if you feel the need to further reduce exposure there to give yourselves a little bit more cushion now that the agency portfolio has been meaningfully reduced.

Yeah. I think we have a lot of flexibility there actually. So I don't think we feel pressure from a retesting perspective. But I think I mentioned earlier that we're not going to sell at the wrong time and we're going to make sure if we sell the non-requalifying assets that it makes sense versus what we can replace that capital with. But I think when you think about, again, what businesses we see as having longer term opportunities in terms of supply demand and balance in terms of the competition being hobbled. It's in a lot of those loan strategies. So I don't want to make prediction in the short term. But in the long term, certainly I would think that that's where we would ultimately be heading the company. And I think that's consistent, frankly, with where we were pre-COVID.

Yeah, okay.

I would just add real quick. I'm sorry. I would just add to what Larry said. I mean, the majority of our assets are now requalifying even away from just the agency. So when you think about the size of our non-QM portfolio and small balance commercial and residential transition those are all and have levered have some leverage on and they're all real estate qualifying assets. So that helps as well.

Yeah. Fair enough. Appreciate the color there, guys.

Thank you.

Your next question comes from the line of Matt Howlett with Nomura.

Hey, guys. Thanks for taking my question. Hope you're saying safe. First, I got to come into any one of the more upbeat bullish calls that I've been on here in the earnings season. You seem to know exactly what you want. And actually where you're going with the company. My question is, you have all these originators that you get proprietary flow product. What's the trade-off between find out or finding something that you want that's in the secondary market that may be more of a distressed price? And I will follow up.

Yeah, no. We want to do that to. Mark, you want to take that where we're all for looking at good opportunities in the secondary market if the price is right. Mark, you want to talk about what you seeing?

That's a very good question. I think we want to do both. And I think we've worked very hard through March into April, getting ourselves in a position where it's prudent for us to take advantage of those opportunities. So I think, we talked about we're restarting non-QM origination, but in the short one we expect volumes to be significantly smaller than where they were running January and February. So while we start that we don't anticipate that being a big capital drain. So I think we'll be in a position to be able to do both. And I think that we can price appropriately. When we look at potentially a secondary package of non-QM loans. We have to really carefully analyze the underwriting standards that were used to originate those loans and compare that to the underwriting standards that we have enforced with LendSure. And, think about the consequences for potential performance if we see gaps in the underwriting guidelines. So we can do all that. So I think both opportunities are compelling. If there's secondary packages from people that needs to raise cash, and it looks like they're well underwritten, or we can get a subset of them that are well underwritten. And to very high loss, adjusted yield that'll make sense. They also think restarting our own non-QM origination with guidelines that are similar to what they were like a couple years ago. And pricing to reflect generally higher credit yields in the marketplace, makes sense as well. So I think they're both good opportunities, and I don't think we have to choose one or the other. I just think we need to price them appropriately. And take into account all sort of relevant factors. But that's a good question. And they're both good opportunities for this company.

Yeah. And if I could just add, I think the small balance commercial mortgage space for us is really interesting there too. For years, we've been doing that strategy for a long time here at Ellington. And for years, especially after the financial crisis, we started it shortly after the financial crisis. It was mostly a secondary market NPL business. As you can imagine, after the financial crisis, there were a lot of loans that were hitting maturity defaults and things like that. And so that ended up slowly evolving. And in recent years became more of a bridge loan business where we were seeing less of the distressed product developments secondary market, which would typically be an NPL right or and we are seeing more opportunities to originate bridge loans and, that's sort of that that's a business that's kind of always there. Well, now, I think I'm not saying that the balance is going to swing completely back to NPLs. But I'm going to -- but I do believe that again longer term a lot of commercial properties in specific sectors, in specific regions are going to get distressed. And our strategy in the small balanced commercial NPL space has always been and our thoughts have always been that most banks they want to focus on working out bigger loans. So $50 million loans, bigger loans. And smaller loans, they get pressure from their regulators it's a headache for them. We have a lot of -- we have built up a lot of sourcing providers over the years, whether it be brokers, partners, joint venture partners, et cetera, where we can source this product. So I'm also really looking forward to seeing more in the secondary market in NPLs and small balance commercial. And that historically has been a very profitable business for us, because you're really taking a headache off of someone else's play. And you have an opportunity also to work with the borrowers there are you buying loans at a discount. A lot of banks don't like to take discounted payoffs. They'd rather -- it sort of creates almost like a moral hazard for their borrower base, they'd rather sell the loan at a discount. And now that gives us a lot more flexibility to work with the borrower on a discounted payoff, ultimately. So anyway, so that's a business in terms of your question about looking for things in the secondary market. As opposed to origination, we're absolutely hopeful that this will be now another sustained opportunity after a financial crisis. Just like it was after the 2008, 2009 crisis.

And certainly with the GI agreement, because GSEs are going to be coming out with stuff the banks as well. Just getting back to Mark's comment on the LTEs tightening. Your standard could even raise the GSE. How interested are you guys in taking another step finding an originator? I'm sure, there's a lot of shifts out that they're taking bigger stakes than what you own. Getting ready for maybe tighter GSE window and being on that new origination down the road take a bigger piece of it?

Yes, I can't make any predictions, but I can tell you that you're thinking how we're thinking. And we're seeing a lot of seeing a lot of opportunities out there to do exactly that. And I can't predict whether any of them will come through. But we're -- I think we're on the same wavelength.

Great. Thanks everyone.

And that does to conclude today's conference. You may now disconnect.