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Ellington Financial LLCÂ (EFC)
Q2Â 2019 Earnings Call
Aug 6, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Ellington Financial Second Quarter 2019 Earnings Conference Call. [Operator Instructions]
It is now my pleasure to turn the call over to Jason Frank, Corporate Counsel and Secretary. Sir, you may begin.
Jason Frank -- Corporate Counsel and Secretary
Thank you. 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 14, 2019.
Forward-looking statements are subject to a variety of risks and uncertainties that could cause the Company's actual results to differ from its beliefs, expectations, estimates and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call, and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
I have on the call with me today, Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our Co-Chief Investment Officer; and JR Herlihy, our Chief Financial Officer.
As described in our earnings press release, our second 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.
Laurence Penn -- Chief Executive Officer & President
Thanks, Jay, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. On our call today, I'll start with an overview of the second quarter. Next, JR will summarize our financial results. And then Mark will discuss our portfolio positioning and performance, recent market trends and our investment outlook going forward. Finally, I will provide some closing comments, and then we'll open the floor to your questions.
Ellington Financial continued its strong performance through the second quarter of 2019, driven by broad-based contributions from our diversified credit and agency portfolios, both net income and core earnings again exceeded our dividend run rate and we generated an annualized economic return of 9.4% for the quarter, including, after all, mark to market adjustments.
During the quarter, we benefited from notably strong performance from our residential non-performing mortgage loans and our small-balance commercial mortgage loans, our consumer loans and our non-agency RMBS portfolio. We also took advantage of numerous trading opportunities, resulting in excellent performance in our CMBS portfolio and our European RMBS portfolio. Our agency strategy also generated solid economic returns for the quarter. We are also starting to see meaningful contributions from our growing residential transition loan business, which Mark will discuss in a bit more detail later.
Our non-QM loan business had another excellent quarter highlighted by our successful completion in June of Ellington Financial's third non-QM securitization. I was extremely pleased with the execution of the securitization, that continue to be very excited about the growth prospects for our non-QM portfolio. At the same time that we are growing our non-QM portfolio, because we also have a strategic equity investment in LendSure. We are benefiting from LendSure's growing franchise value, as the Company continues to ramp up production and expand its footprint nationally and as the quality of LendSure's loan production remains excellent.
Our flow agreement with LendSure is just access to a steady pipeline of loans, enabling us to participate in what has been incredibly strong marketwide growth. Marketwide 2019 non-QM origination volumes are on track to double 2018 volumes. Meanwhile, the non-QM industry just got a boost on the regulatory front, as in late July the Consumer Financial Protection Bureau announced that it will let the so-called QM patch expire on January 2021 or shortly thereafter. The QM patch is the regulatory exception that allows Fannie Mae and Freddie Mac to guarantee certain loans that would otherwise be considered non-QM loans.
Well, a lot can happen between now and January 2021, all signs point to a larger role for the private sector, especially specialty non-QM lenders in this segment of the mortgage market, which is at times represented over 30% of Fannie Mae and Freddie Mac's volume. Given the strength of the LendSure franchise and its sourcing capabilities, we believe that EFC will be in a prime position to capitalize on this growth opportunity.
Please turn now to Slide Four in the presentation. You can see here that the size of the credit portfolio stood at $1.07 billion at quarter end. But keep in mind that we present this figure after reversing out the consolidation of our non-QM securitizations. In fact, on a consolidated basis, our long credit portfolio actually grew by almost 5% quarter-over-quarter.
By quarter end, our leverage was fairly full and we had already rotated out of almost all of the non-requalifying assets that we had earmarked for disposition. As a result, we found ourselves in need of additional capital to fund our incoming loan flow and the many other attractive investment opportunities that we're seeing across the portfolio. To that end, in July, we launched our first equity capital raise in five years, raising $70 million dollars. I'll discuss our equity raise in a bit more detail in my concluding remarks.
Also on Slide Four, you can see that our agency portfolio grew 17% from the prior quarter, and despite a challenging quarter for agency assets, the portfolio contributed positive results. As we have previously discussed, these additions to our agency portfolio were always planned following our REIT conversion, as the agency investments help with both our REIT test and our 1940 Act test.
As of June 30th, our capital allocation to agencies was 21%, which is on the upper end of the historical range for us. Towards the end of the second quarter, we believe that the agency RMBS offered excellent value, especially in light of the tightening we have seen in corporate bond spreads, which had been matched yet by agency RMBS yield spread tightening. As a result of this market view, we didn't materially increase our net TBA short position in the second quarter, even as we were adding agency RMBS assets and so we were able to take advantage of the tightening agency RMBS yield spreads that we saw in July.
You can also see on Slide Four, that our overall debt-to-equity ratio increased to 4 times the score from 3.4 times last quarter. The increase was mainly due to borrowings to accommodate our larger non-QM loan holdings, which are consolidated for GAAP reporting purposes and also borrowings to accommodate our larger agency RMBS portfolio, which I mention now represents a larger portion of our overall capital allocation and which utilizes higher leverage.
We now consolidate three non-QM securitizations onto our balance sheet. Excluding these non-QM securitization financings, as well as other non-recourse borrowings, our recourse debt-to-equity ratio was 2.8 times at quarter end, so only a modest increase as compared to 2.6 times at March 31st.
And with that, I'll turn the call over to JR to go through our financial results for the quarter in more detail.
JR Herlihy -- Chief Financial Officer
Thanks, Larry, and good morning, everyone. Please turn to Slide Six for a summary of our income statement. For the quarter ended June 30, 2019 EFC reported net income of $12.6 million, or $0.43 per share compared to $15.4 million, or $0.52 per share for the first quarter. Net income during the second quarter included strong net interest income of $18.8 million, earnings from investments in unconsolidated entities of $2.4 million and other income of $2.8 million.
For the second quarter, expenses were $9.9 million in income expense -- income tax expense was $376,000 related to taxable income in our domestic taxable REIT subsidiaries. Core earnings for the second quarter was $13.6 million, or $0.46 per share, an increase from $13.3 million, or $0.45 per share in the first quarter.
Please keep in mind that while we view core earnings as a good proxy for our earnings power, it does have its limitation, as a portion of our capital will always be invested in certain assets, such as our strategic equity investments and loan originators like LendSure that we hold for capital appreciation, as opposed to generating current core earnings. In addition, core earnings does not capture much of the total return that we generate with our opportunistic trading.
Please turn to Slide Seven for details on the attribution of earnings between our credit and agency strategies. In the second quarter, the credit strategy generated gross income of $16.3 million, or $0.54 per share, while the agency strategy generated gross income of $2.2 million, or $0.07 per share. In the credit strategy, total net interest income was $18.6 million, net realized and unrealized gains were $2.4 million in earnings from investments in unconsolidated entities were $2.4 million as growing net interest income, successful securitization activity and trading activity drove results. The majority of the net realized and unrealized gains in the credit strategy came from our non-QM loan, residential non-performing loan, European RMBS and CMBS portfolios. While this quarter, we had underperformance from retained investments in Ellington-sponsored CLOs.
We incurred a net loss of $1.9 million on interest rate hedges and credit hedges and other activities. Other investment related expenses increased to $5.2 million this quarter from $3.5 million, primarily reflecting issuance costs for the non-QM securitization that we completed in June.
In the agency strategy, declining interest rates generated net realized and unrealized gains on our agency specified pool assets of $15.2 million, while net interest income totaled $1.6 million. This income was partially offset by net losses on our interest rate hedges and other activities of $14.6 million.
Additionally, the outperformance of agency specified pools compared to TBAs, in the form of higher pay-ups for specified pools, contributed positively to our results, as we continued to concentrate our long investments in specified pools as opposed to TBAs. The key drivers of the expansion in specified pool pay-ups were increases in actual and projected prepayments, as a result of declining mortgage rates. Average pay-ups on our specified pools increased to 1.37% as of June 30, 2019, from 0.94% as of March 31, 2019.
Turning next to Slide Eight. At June 30th, the size of the credit portfolio was $1.07 billion, down a bit more than 10% from the prior quarter. But consistent with prior quarters, and as Larry mentioned, these totals are quoted after reversing out the consolidation of our non-QM securitization trusts. The final note here is that as of last Friday, our non-QM loan portfolio in the warehouse awaiting our next potential securitization has grown back to about $140 million.
On Slide Nine, you can see that the size of our long agency portfolio grew to $1.3 billion, an increase of 17% quarter-over-quarter. We continue to concentrate our long holdings and prepayment protected specified pools. At quarter end, we had a total debt-to-equity ratio of 4 to 1 and recourse debt-to-equity ratio of 2.8 to 1. These compared to 3.4 and 2.6 respectively for the prior quarter.
As you can see back on Slide Five, the debt-to-equity ratio on equity allocated to the agency portfolio reached 9.9 times this quarter, up from 8.8 to 1 last quarter. As we previously discussed, we are comfortable utilizing more leverage on our agency assets because of their liquidity and lack of credit risk. But an additional nuance here is that effective leverage on the agency portfolio at quarter end was much lower the 9.9 times, when factoring in the significant short TBA position, we maintain as part of our interest rate hedging portfolio.
Turning to Slide 18. Here we show our net agency pool assets to equity ratio, which we define as the net aggregate market value of our agency pools less our net short TBA position divided by allocated equity. This measure was only 5.6 to 1 at June 30th.
And on Slide 17th, you can see that about 36% of our interest rate hedging portfolio was in short positions and TBAs at quarter end. Our use of short positions and TBAs to hedge a significant portion of the interest rate risk in our agency portfolio is a distinguishing factor in our agency strategy in a few ways.
First, we believe that the strategy reduces the risk and earnings volatility from the agency portfolio, by keeping our effective overall asset exposure lower than most of the agency mortgage REITs. Second, it enables us to take advantage of dislocations and specified pool payouts without increasing our overall net exposure to agency yield spreads. And third, during times of increased volatility, we avoid the high rebalancing costs associated with interest rate swap hedges.
For the second quarter, our total G&A expenses were $4.8 million, down from $5.7 million in the first quarter. As we mentioned previously, G&A in the first quarter have been elevated due to approximately $1.1 million of costs related to our REIT conversion. In the second quarter, we incurred an additional $241,000 of costs related to the REIT conversion or less than $0.01 per share and we do not anticipate incurring any further material reconversion costs. At June 30th, book value per share was $18.91, which included the effect of $0.42 per share of dividends paid during the second quarter.
Now over to Mark.
Mark Tecotzky -- Co-Chief Investment Officer
Thanks, JR. The second quarter was volatile, not only for interest rates, but also for credit spreads. The S&P gained over 4% for the quarter, but intra-quarter moves were dramatic, including the down 6% return in May. For EFC with its diversified portfolio, our focus over the past year has been adding low LTV real estate related loans and our monthly terms were much more stable this quarter.
One consequence of our portfolio evolution away from longer-dated securities and into shorter-dated loans is more mark to market stability. Meanwhile, volatility is picking up dramatically in Q3. This volatility is coming from exogenous factors, like looming trade war and uncertain Federal Reserve policy.
One way we like to try to inflate our portfolio from this volatility is through asset selection. To this end, we continue to focus on low LTV loan investments backed by real assets. So, not surprisingly, real estate related loan strategies led the way for our performance in Q2. Small balance commercial real estate loans were again an important contributor to our return for the quarter. Our non-QM platform continues to grow and reach new milestones. We did a securitization deal in June and LendSure had its biggest origination month ever in July with over $50 million in loans closed. We continue to see excellent performance and we continue to see multiple ways to grow. It's very gratifying to see the development of LendSure from a start-up back in 2015 to the 150 person operation it is today.
Meanwhile, the new Head of FHFA, Mark Calabria has made clear his desire to shrink the GSC footprint. And now with the CFPB statement about the QM, as Larry discussed earlier, we think that more and more the mortgage market will gradually shift away from the GSC and toward private capital in the coming years. EFC is well positioned to take advantage of that opportunity.
The same team at Ellington Financial that manages our non-QM business has been steadily and cautiously ramping up our residential transitional loan portfolio, commonly referred to as fix-and-flip business. We now have over $50 million invested at very attractive unlevered deals and together with the highly advantageous financing arrangements that we have secured, we believe we can generate excellent ROEs.
While there has been a lot of capital raised to take advantage of the fix-and-flip opportunity, we think that long-term this is a great market to be in, as the sector is filling an important and growing need. The median age of the U.S. home is now about 37 years, up significantly from where it was pre-crisis. This creates a tremendous need for capital and the remodeling market.
New home construction is not keeping pace with demand for housing, so private capital is stepping in. Meanwhile, our consumer loan business, which focuses on strong partners with unique access to borrowers, whom we want to target had a strong quarter as well. But it wasn't just our loan strategies that drove returns this quarter. Our focus on security selection against the backdrop of market volatility allowed us to generate significant returns, securities focused strategies such as CMBS, non-agency CMBS and European MBS. And then it was a very challenging quarter for agency CMBS. I'm very proud to report that the agency strategy in EFC generated a positive return on equity.
In agency, a lower leverage, our focus on specified pools and attractive trading with the keys to strong performance in the face of increasing prepayment risk. Of course, we had headwinds to this quarter, triple-C rated loans dramatically underperformed high yield bonds during the quarter, hurting our valuations and our retained CLO tranches. Our credit hedges were also a small drag on the returns.
Let's look at how the portfolio evolved in the Slide Eight. It looks like the portfolio shrank, as Larry and JR mentioned that was primarily just a consequence of the non-QM securitization that we completed. One great feature of the non-QM deals is that EFC retains the call rates on those deals. So, EFC has the option, but not the obligation to get those loans back in the portfolio in the future, which can be extremely profitable, if the underlying loans are trading a big premium like they are today. Also on this slide, you can see what we can -- you can see that we continue to grow our small balance commercial real estate portfolio during the quarter.
At Slide Nine, you can see that the agency strategy grew as well. We took advantage of the volatility to add some pools that looked attractive versus the swap hedge and others versus the TBA hedge. Those trades can be easily unwound in the future in favor of higher yielding less liquid investments as they become available.
Looking forward, we are positioning the portfolio to be opportunistic. We've had some incredible volatility in the past week and volatility often leads some very compelling investments. We've already seen high yield indices pull back around 2 points from their July highs. We continue to deploy capital from the equity raise and then our approach to get invested in more liquid investments in the short run and trade out of those as we fund loans. EFC has a big future pipeline for proprietary loans, small balance commercial, non-QM, fix-and-fit and consumer loan partnerships. We have a lot less competition from other pools of capital to get invested. We have been laying this groundwork for years.
One benefit of growth is that for many of the EFC strategies are always improved with scale. Non-QM is a great example. The economics get better as the volume increases because the shorter time it takes to ramp each successive securitization. What we are trying to do with EFC is [00:37:34] (Technical Difficulties] strategy, to drive a net interest margin that more inflated from the volatility of more commodities credit and rate strategies. We believe that this, along with our strategic equity investments will create great franchise value for the company.
Now back to Larry.
Laurence Penn -- Chief Executive Officer & President
Thanks, Mark. I'm very pleased with our performance so far this year. For the first half of 2019, we have now delivered an annualized economic return of 10.4% and we've grown Core Earnings nicely to $0.46 per share, providing both excess coverage for our $0.14 monthly dividend and stability to our GAAP earnings.
Of course, we successfully completed our conversion to a REIT in the first half, and this triggered our inclusion in two major stock indices, improving the trading volume of our stock and ultimately helped close most of the gap between our share price and book value. Given the tremendous growth in passive index-based investing, our inclusion in the Russell 2000 and the Vanguard Total Stock Market Index is particularly important and gives us the opportunity to expand our visibility among investors.
On the heels of these achievements, in July we have raised $70 million in our first equity offering since 2014. Deployment of the proceeds is going very well. As a fresh capital is allowing us to take advantage of the attractive investment opportunities that we are seeing across our diversified portfolio. Given the sharp risk-off sentiment, we've seen just in the past week, we hope and expect to see even better opportunities. So, I think that our timing was excellent and we're excited to have the dry powder.
The capital raises also helped us to continue to diversify our investor base and add institutional shareholders. We believe that has improved the liquidity of our stock, as seems evident from our average daily trading volumes. It's never an easy decision to issue stock below book value, but we projected our larger equity base result in significant operating expense savings on a per share basis and given the high returns on equity we are seeing on incremental investments, we projected the overall race will be nicely accretive to earnings more than it outweighing the moderate short term dilutive effect on book value per share.
Finally, I'd like to point out that since our last raise around five years ago, we have repurchased a substantial amount of our shares at deep discounts to book value per share. So, our capital management strategy has been opportunistic.
Looking forward to the second half of the year, as Mark mentioned, we will continue to focus on a proprietary loan portfolios and pipelines, which we believe are critical in enabling us to manufacture and control our own sources of return, rather than merely relying on whatever the securities markets have to offer. At the same time, we will continue to protect book value with our dynamic hedging strategies and prudent leverage. Given the strength and diversity of our portfolio, we believe that we are well positioned to grow Core Earnings from here.
And with that, we'll now open the call to your questions. Operator, please go ahead.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of the Steve Delaney with JMP Securities.
Steve Delaney -- JMP Securities -- Analyst
Good morning, everyone. Thanks for taking the question. And I have to say congratulations on your vision and success with LendSure.
Laurence Penn -- Chief Executive Officer & President
Thank you.
Steve Delaney -- JMP Securities -- Analyst
So, glad you stuck with that. The first question would be on the fix-and-flip. I'm just curious, does LendSure do that product as well, or are you sourcing those loans from another strategic relationship or two?
Mark Tecotzky -- Co-Chief Investment Officer
Hey, steve. This is Mark.
Steve Delaney -- JMP Securities -- Analyst
Hi, Mark.
Mark Tecotzky -- Co-Chief Investment Officer
I'm going to take your question. So, the team in Connecticut that oversees LendSure and works with LendSure that team has built out relationships with fix-and-flip originators. So, we are not running those settlements through LendSure.
Steve Delaney -- JMP Securities -- Analyst
Okay. They are not. So, your desk, if you will, is working, I'm going to assume with just various originators of that product around the country. Is that -- so LendSure is not doing it, so you're sourcing it elsewhere, right?
Mark Tecotzky -- Co-Chief Investment Officer
Yeah. That's exactly right. We thought about having LendSure work on that, and the consensus was that it was better to keep management at LendSure focused strictly on non-QM. And so that was what management wanted to do. They really, really wanted to drive the non-QM volume with the non-QM business and didn't feel they had the bandwidth to take on additional, you know, additional sectors. Yes, we don't--
Steve Delaney -- JMP Securities -- Analyst
Sure.
Laurence Penn -- Chief Executive Officer & President
Hery sorry. We don't currently have a strategic equity investment.
Steve Delaney -- JMP Securities -- Analyst
Got it.
Laurence Penn -- Chief Executive Officer & President
In any of these other the fix-and-flip lenders that we are doing business with. But--
Steve Delaney -- JMP Securities -- Analyst
Okay.
Laurence Penn -- Chief Executive Officer & President
But those opportunities are out there. But there's -- we're not seriously considering anything at this precisely.
Steve Delaney -- JMP Securities -- Analyst
Right. And at this point in time, the QM market opportunity, I assume is multiples of what fix-and-flip would be, not to mention less complex servicing situation?
Laurence Penn -- Chief Executive Officer & President
Yeah. Not really. Not really.
Steve Delaney -- JMP Securities -- Analyst
Oh really?
Laurence Penn -- Chief Executive Officer & President
Yeah. You know, I think, we're ramping up in this business, but I think that if you look at what the capacity is for us especially, I think, you could right now, of course, non-QM is we've got bigger production per month than we do in fix-and-flip. But that could reverse.
Steve Delaney -- JMP Securities -- Analyst
Yes.
Laurence Penn -- Chief Executive Officer & President
You know that could reverse, I'd say 6 to 12 months from now. It could be the other way for sure.
Steve Delaney -- JMP Securities -- Analyst
Well, that's a good segue way, because, that the in QM market today versus, you know, a year ago even is dramatically different. I mean, we've seen large players like [Indecipherable] step into the market.
I'm just curious how the entry of -- the growth to that market and more participants, how that is impacted the structures, the spreads, returns, as more capital enters the space?
Laurence Penn -- Chief Executive Officer & President
I think it's sort of two-pronged. The -- it's true that there's a lot more competition in terms of capital providers. But the market is also growing in leaps and bounces. So, I think you just seeing a market that's growing both on the demand side and the supply side.
Steve Delaney -- JMP Securities -- Analyst
Yes.
Laurence Penn -- Chief Executive Officer & President
And as Mark mentioned, you're really at a -- it's really a regime change almost in terms of the housing market. So, we think that this is an important market for us to be in. We think that, as I just mentioned, they'll be as much increased capital -- capital supply there will be capital demand. So, we really like the prospects of this market going forward.
Steve Delaney -- JMP Securities -- Analyst
And how the rating agencies, -- how have you seen any improvement in their, you know, how they're haircutting loans and their retention and things like that? Or, is it pretty much same product that was six or 12 months?
Laurence Penn -- Chief Executive Officer & President
We're not -- we don't have any plans to securitize this the same as we do with the LendSure loans. These loans are shorter.
Steve Delaney -- JMP Securities -- Analyst
I'm sorry. I was actually referring to non-QM. I apologize.
Laurence Penn -- Chief Executive Officer & President
Sorry. Okay. Yeah. You know, I think if you look at what the rating agencies are doing, the benefit the rating agencies have in 2019 versus, say 2017 was they have more data, non-QM performance.
Steve Delaney -- JMP Securities -- Analyst
Yes.
Laurence Penn -- Chief Executive Officer & President
Right. So, I think understandably the capital structures were fairly conservative, when these deals first started getting done 2016- 2017. They have not changed materially, but I do expect over time there'll be some gradual improvement in the capital structures. But you haven't really seen it to date, but now at least the rating agencies have -- no, they're starting to get sufficient body of data on, you know, default rate severities.
So, if something was going to happen, I would guess the focus would be the slightly more -- more aggressive capital structures. I mean, when you talk about non-QM and you mentioned another pools of capital entering the market, you know, for us, we have looked at that. And I think it's important for us to really keep our focus on low LTV originations. Right. That we will tolerate a little bit lower rate than maybe some of our competitors if we can get lower LTVs. And that has really been our focus. You are seeing some more non-QM origination at higher LTV levels and that for us has not been a growth area.
Steve Delaney -- JMP Securities -- Analyst
I hear you, and I'm glad to hear that given that the bond market is telling us that we might have a recession before too very long. I think your low LTV is your best line of defense. Well, thank you both for -- go ahead.
Laurence Penn -- Chief Executive Officer & President
I can add that every region of the country is different too, right. So, we think, I mean, you see some people originating 95% LTV loans in non-QM and that's pretty -- it's pretty risky, especially in we're careful about what parts of the country we're going to lend to. We're careful about, if you extend a loan at 95% LTV, factoring in the brokerage costs, if you do have to foreclosing that loan, you're practically in the whole to start with.
So, it's -- LTV is key to us. And as Mark mentioned, our average LTV and our maximum LTV is lower than a lot of the other lenders, who maybe are clipping a little bit high coupon, but we think taking more risk than we would like to.
Steve Delaney -- JMP Securities -- Analyst
Great. Thank you both for your comments.
Mark Tecotzky -- Co-Chief Investment Officer
Thanks, Steve.
Operator
Your next question comes from the line of Doug Harter with Credit Suisse.
Douglas Harter -- Credit Suisse -- Analyst
Thanks. Just want to ask a couple of questions about the capital deployment. One, how long do you expect it will take to complete the rotation from the shorter term assets to the targeted long-term assets, that you ultimately want to be in?
Laurence Penn -- Chief Executive Officer & President
JR you want to take that?
JR Herlihy -- Chief Financial Officer
Yeah. Doug it's JR. Yeah, I don't know that we've put an exact timeline on it. But I'll tell you what we've accomplished since the raise a couple weeks ago and where we're looking this week. So, we've been deliberate investing in proceeds from the raise and the volatility the past few days is generating lots of investment opportunities, as both Larry and Mark spoke about.
So, in one sense patience is rewarded in a market like this. But on the other hand, we don't want to sit on cash and have that be a drag on earnings. So, we're looking to strike a balance between those two considerations. So, the first step we took, when we completed the raise was to immediately pay down expensive repo and buy some more liquid investments as a temporary use of cash.
And then as the loan pipelines generate product, we buy the flow and that's been mostly small balanced commercial, non-QM, residential transition loans, the fix-and-flip and consumer. So, since quarter end, the best way to measure that progress is, the credit portfolio has grown by more than $60 million and the agency is a little bit bigger about $12 million larger. So, that translates to a little shy of 40% of the capital from the rate is deployed as of today.
With that said, we're set to close several loans this week. Again, mostly non-QM and small balance commercial, which should take us closer to about 60% deployed, if all those happen as scheduled. So, that's where we are kind of pro forma for this week. But again, given the volatility the past few days and the opportunities that creating, we're pleased to have the dry powder to capitalize on those opportunities.
Douglas Harter -- Credit Suisse -- Analyst
And then can you just talk about your kind of hedging plans, if you have kind of more of these liquid short-term investments on, you know, in case the markets kind of remain volatile or move lower or wider from here, thoughts about incremental credit hedges, you know, on those -- on that piece of the portfolio?
Laurence Penn -- Chief Executive Officer & President
I think on the credit hedging side, we're pretty comfortable with where we've been. If you look at the last couple of quarters, it's been very stable. We have a slide in the supplemental section probably that shows our credit hedges. So, I don't -- we don't expect to see a big difference in our credit hedges. On our interest rate hedges, as you know, we're very disciplined about keeping our overall duration low. But we will move around certainly our TBA hedge, which moves around -- can move around quite a bit from quarter-to-quarter. We've spreads were wide coming into July. They tightened in July quite a bit.
Mark, you want to comment on our TBA hedge at this point? I mean, the lot, you know, the some of the liquid investments that JR mentioned obviously were agency in terms of where, you know, what you think the spreads here?
Mark Tecotzky -- Co-Chief Investment Officer
So, you know, now with this move lower in interest rates just really in the past week, there's some we spoke about on the call for earn, right? Some of the changes in the prepayment landscape that we've been thinking about for a while, you know, increasing technology and increasing an issues from the GSCs for day one certainly in property inspection waivers.
We thought sort of this wet blanket period of time for prepayments, which kind of like 2011 to maybe 2017 is really firmly behind us now. So, we think prepayment risk is here. It's material. It certainly weighs on TBA. But it certainly benefits specified pools and I think what it's done is created a lot of opportunities for relative value.
You know, when you have a interest rate regime, where all prepayments are sort of similar, which is kind of a lot of 2018, there wasn't big difference in threes and fives. There wasn't that much relative value gains to be made from really understanding loan programs and servicers. And that's not the case now, right.
So, while the risk is higher, the trading opportunities are much more significant because, being right on prepayments, you're very well compensated for in this market. So, I would say that, pay ups on sort of the most commodities forms of prepayment protection. They've run a lot. We're not as big fans as we used to be. But we're finding some more nuance prepayment stories that we think are very attractive at the current levels.
Laurence Penn -- Chief Executive Officer & President
And if I could just add that with rates this low, in a higher rate environment, you've got when you look at the performance of TVAs , it's going to be very dominated by technical factors a lot of times, right? What the fed was doing, rolls, things like that in an environment that you have today, you're going to see a big divergence, I think, in the performance of different TVA coupons, based on real fundamental performance and prepayments. And that data is going to come out -- come out every month. So, it's a great market to have this flexibility that we have in terms of how we hedge, which TVA coupons are we going to hedge with, to what extent are we going to hedge with TVAs.
We believe a simple way to hedge interest rates, obviously it's just to put an interest rate swap on various points along the curve. But we believe that we can do better than that by being selective in terms of, let's use TBAs, let's determine how much we're going to use and let's determine which coupons we're gonna use. We do even better than having a short position in swaps and still maintain our kind of indifference to which way rates are moving, whether they're going up or down.
Douglas Harter -- Credit Suisse -- Analyst
Great. And then just one last one. Your kind of Core Earnings is now kind of comfortably exceeding your dividend level, you know, kind of how are you and the Board thinking about dividend levels going forward?
Laurence Penn -- Chief Executive Officer & President
Yeah. So, exactly what you said, we now have a few months behind us, where we've exceeded the dividend by a little bit. So, I think that my personal belief is that the -- couldn't say when the next move and the next change in the dividend is going to be. My personal belief is that whenever that is -- it will be a slight upward move. But I couldn't say when that might be.
Douglas Harter -- Credit Suisse -- Analyst
Great. Thank you.
Operator
Your next question comes from the line of Crispin Love with Sandler O'Neill.
Crispin Love -- Sandler O'Neill Partners, L.P. -- Analyst
Hi, guys. Thanks for taking my question. Larry, you commented that you're well positioned to grow Core Earnings from here. Can you go into a little more detail there. Do you expect to keep growing from the $0.46 run rate that we saw this quarter? Or, should there be a cash drag from the equity raise in the third quarter to cause a slight softening to core EPS near term?
Laurence Penn -- Chief Executive Officer & President
Yeah. Well, as JR mentioned, we're already 40% deployed. So, I don't see that being a big deal. And if you look at where we're adding investments on the margin comfortably into the mid-teens ROE. So, that it should continue to be accretive to earnings, as we replace lower ROE assets, we kept some of the -- the sort of non-core producing assets, if you will. We still have a bunch of assets in the portfolio from a total returns perspective are sort of waiting for those to perform, from a price performance perspective. So, as we replace those and we're in no rush to do this, but as we replace those with the loan flow that's coming in, where we're earning higher ROEs and then, we can be very selective in terms of where we're going to deploy capital.
The fix-and-flip business has excellent ROEs, when you look at where the unlevered returns are versus our financing costs. Non-QM, as Mark mentioned, with bigger productions, we expect to see securitizations come closer to each other in time and again that's a higher ROE on that strategy all of the things being equal.
So, I think we have a lot of points that we're going to be hitting on that will just continue to have incremental benefits to our core. I don't think that it's not something that you're going to see, you know, every quarter necessarily a big increase. But it is something, where I just think the momentum is going to continue to be upward as we are selective in terms of where we focus our loan flow. So, and as we continue sort of this rotation of the portfolio out of some assets that are not as core producing, but still we like from the total returns perspective to more core producing assets.
Crispin Love -- Sandler O'Neill Partners, L.P. -- Analyst
Thanks, Larry. That's it from me.
Laurence Penn -- Chief Executive Officer & President
Thanks Crispin.
Operator
Your next question comes from the line of Tim Hayes with B. Riley FBR.
Tim Hayes -- B. Riley FBR -- Analyst
Hey, good afternoon, guys, and thanks for taking my questions. Most have been answered, but just a couple of follow ups here. Your stocks acting well today, but has been off since announcing the secondary. And I know historically you've been buyer of the stock between kind of that 80% and 85% book value level.
But following the REIT conversion, you've kind of said, you know, you've closed the gap to book value with the stock and the trading liquidity has improved. So, just curious if you've considered buying back stock over the past few days with the stock trading slightly under 90% of book value, or if nothing changed with how you view that level?
Laurence Penn -- Chief Executive Officer & President
Yeah, I don't think anything's really changed there. We're seeing great opportunities on the investment side, especially with what's happened in the last couple of weeks, so. But frankly, even without that, I think, are we would still kind of have the same discipline in terms of where we will target buybacks.
Tim Hayes -- B. Riley FBR -- Analyst
Okay, understood. And then one more for me. Just some of your REIT peers have highlighted an increased focus on the European markets, given some stronger returns there. And I know that's kind of a broad statement. And you've been shrinking your UK non-conforming RMBS strategy. But just wondering if you share that view and if you are seeing room to increase exposure there, whether it would be with NPLs, or any other types of assets you might find attractive?
JR Herlihy -- Chief Financial Officer
Hi, Tim, It's JR. So, Europe has been a kind of a great driver of incremental returns for the capital that we've invested, whether it's the RMBS strategies or the NPL strategies, we also have some investments in CBS and CLO. I think the common theme across many of those strategies is they don't qualify for the 75% asset test for REIT. So, some do, but most don't.
So, we've been kind of pairing those holding down to prepare to qualify for the REIT. But as Larry mentioned, I'd say it reach the point in mid-year, where we effectively done with the rotation. So, now it's back to relative value and looking for opportunities across markets and that includes Europe.
I think the next -- I guess the next point, I'd make is that, we talked a lot about this in Q1, but we had a very good outcome on securitization, resecuritizing some loans and that were higher space. So, that was a great P&L driver for us that continues to be. So, yeah, I think again, relative value including Europe is where we look for opportunities.
Laurence Penn -- Chief Executive Officer & President
Yeah, we have a team in London, here at Ellington, they've done a great job. We are not -- we're never forced to be in that market, Ellington financial. Ellington manages other pockets of capital that keep those guys very busy. But when opportunities do arise, where there Ellington Financial is happy to participate in those opportunities, now that we're sort of comfortably passing our retests. We can, you know, think about reinvigorating that portfolio again, if something really, really attractive, you know, shows up there. So, I think we're very well positioned to take advantage of opportunities there. But there's nothing really big that we're pursuing at this precise moment in time.
Tim Hayes -- B. Riley FBR -- Analyst
Okay, thanks. Appreciate the comments.
Laurence Penn -- Chief Executive Officer & President
Thanks.
Operator
Your next question comes from a line of Eric Hagen with KBW.
Eric Hagen -- Keefe, Bruyette and Woods -- Analyst
Thanks. Good morning and congrats on a really solid first half of the year.
Laurence Penn -- Chief Executive Officer & President
Thanks, Eric.
Eric Hagen -- Keefe, Bruyette and Woods -- Analyst
What is the return on equity from acquisition of the non-QM loans from LendSure to securitization to ultimately retaining bonds on your balance sheet? What is the return on equity that you expect in that strategy?
Laurence Penn -- Chief Executive Officer & President
Yeah. So, I'm going to let JR answer that question. This is Larry, but I want to say it depends on a lot of things in terms of, of course, where you end up executing in a securitization, which can be affected by timing and where the markets are at the time. So, there's a lot of variables that can vary from, you know, from quarter-to-quarter. But go ahead, JR.
JR Herlihy -- Chief Financial Officer
Okay. Yeah, so I think there are a few different stages of a non-QM loan cycle, when we -- from when we launch and originates that Ellington Financial, buys it during the warehouse period, and then we securitize it and put the retained tranches on our balance sheet and each kind of stage has a different ROE profile.
I mean I would say, overall, we look for a low mid-teens on the whole cycle leverage factoring in, but there, as Larry mentioned, lots of variables go into that analysis. So, the first is, where is the loan originated and what kind of levered return, can we make while we hold it on repo lines? To that end it kind of looking back to an earlier question on the call, the new entrants in the market have certainly attracted better financing and as the market matures and there are more consistent securitizations in the market and more I think certainty on the exit and the outcome, I think warehouse lenders are more comfortable taking on a risk and in pricing a tighter. So, spreads on repo facilities have definitely got better over the last one to two years. So, that's helped the ROE during the warehouse process.
The timing and the economics of securitization are obviously dependent on where the market is at that moment. But I think, as Larry mentioned in his remarks, we were pleased with the performance of our third deal in June. And that's kind of going according to plan. And then the retained trenches, you know, you put them on the balance sheet and probably the mid-teens conservatively levered. So, the life cycle again, we get to the low to mid-teens, but the other kind of big input is how many securitization we can do for a year. So, we've done one per year over the last couple of years, but at this point, we did one in June, we're back at $140 million as, as we mentioned and the last deal was in the $250 million range. We did 50 in July of new origination. So, if we can get to the point, where we're doing a couple of deals a year, I think, we will be closer to the mid-teens ROE as opposed to the low-teens.
Laurence Penn -- Chief Executive Officer & President
Yeah, you know, I'll just add one more thing that Mark mentioned, we wanted this is the first time we've mentioned this on our earnings calls in is it November Mark that the first -- our first deal becomes callable, right. So, November our first -- now first, it was a small deal. So, only $140 million, it's already factored down to, I think below, slightly below half.
So, we're not talking about a huge amount of loans, maybe we've got $70 million, maybe by November, you know, maybe we'll be down into the $60s million somewhere. But, you know, those loans are trading at big premiums. So, if we call that deal in November, you got to count that as part of our ROE in our non-QM business because that's real. That's real money. We could sell the -- there is that's not something that is contractual, we don't day today if there are -- that are purchasers away then that's fine too. But we have been a loyal purchaser of their product, we have been very happy with, and we hope to continue doing that in the future. And obviously having the equity investment selling to a partner has many, many advantages right for LendSure.
Eric Hagen -- Keefe, Bruyette and Woods -- Analyst
Right. And how much guys your equity actually appreciated? Have you hit kind of double in that? Or you invested X and what it's worth today?
Laurence Penn -- Chief Executive Officer & President
Yeah, I don't think we -- that's not something that we disclose. We used to disclose when we were a partnership, but --
JR Herlihy -- Chief Financial Officer
It is year end it is more than double.
Eric Hagen -- Keefe, Bruyette and Woods -- Analyst
More than double. Okay.
Laurence Penn -- Chief Executive Officer & President
As of year end, but then yeah.
Eric Hagen -- Keefe, Bruyette and Woods -- Analyst
Got it. That's helpful. Thanks you guys.
JR Herlihy -- Chief Financial Officer
Thank you.
Operator
[Operator Closing Remarks]
Duration: 50 minutes
Call participants:
Jason Frank -- Corporate Counsel and Secretary
Laurence Penn -- Chief Executive Officer & President
JR Herlihy -- Chief Financial Officer
Mark Tecotzky -- Co-Chief Investment Officer
Steve Delaney -- JMP Securities -- Analyst
Douglas Harter -- Credit Suisse -- Analyst
Crispin Love -- Sandler O'Neill Partners, L.P. -- Analyst
Tim Hayes -- B. Riley FBR -- Analyst
Eric Hagen -- Keefe, Bruyette and Woods -- Analyst
