Q1 2023 Ellington Financial Inc Earnings Call
Participants
Alaael Shilleh
J. R. Herlihy; CFO & Treasurer; Ellington Financial Inc.
Laurence Eric Penn; CEO, President & Director; Ellington Financial Inc.
Mark Ira Tecotzky; Co-CIO; Ellington Financial Inc.
Bose Thomas George; MD; Keefe, Bruyette, & Woods, Inc., Research Division
Crispin Elliot Love; Director & Senior Research Analyst; Piper Sandler & Co., Research Division
Douglas Michael Harter; Director; Crédit Suisse AG, Research Division
Leon G. Cooperman; Founder, President, CEO & Chairman; Omega Advisors, Inc.
Trevor John Cranston; MD & Equity Research Analyst; JMP Securities LLC, Research Division
Presentation
Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial First Quarter 2023 Earnings Conference Call. Today's call is being recorded. (Operator Instructions)
It is now my pleasure to turn the call over to Alaael Deen Shilleh, Associate General Counsel, you may begin.
Alaael Shilleh
Thank you. Before we start today, 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 as described under item 1A of our annual report on form 10-K for the year ended December 31, 2022, 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'm joined on call today by Larry Penn, of Ellington Financial; Mark Tecotzky, 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 at ellingtonfinancial.com. Management's prepared remarks will track the presentation. Please note that any references to figures in the presentation are qualified in their entirety by the end notes at the back of the presentation.
With that, I now turn the call over to Larry.
Laurence Eric Penn
Thanks, Alaael Deen, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial.
I'll begin on Slide 3 of the presentation. In the first quarter, Ellington Financial generated net income of $0.58 per share and adjusted distributable earnings of $0.45 per share, both up sequentially and both of which covered our dividends for the quarter. Despite some significant market swings during the quarter, most notably in mid-March around the turmoil in the banking sector, EFC generated an economic return of 3.3% or 14% annualized and grew book value per share.
In the second and third sections here on Slide 3, we break out our net income by strategy. You can see that our credit strategy was the primary driver of our results. And also, we had solid contributions from both Agency and Longbridge as well. In Credit, net interest income from our loan portfolios led the way. While in Agency, we actually outperformed in a quarter when Agency MBS underperformed treasuries. And finally, Longbridge had an excellent quarter, driven by strong gain on sale margins and mark-to-market gains on its MSRs and proprietary loans.
During the first quarter, we were again highly opportunistic with our capital management. First, we capitalized on a constructive market in January and February by raising capital through our common ATM when our stock price was much higher than it is today. Then in early February, we took advantage of a narrow window of market stability to raise $100 million of preferred stock. The offering to strong institutional demand, which enabled us to price the offering at a similar yield spread to where we priced our Series B preferred back in December 2021. That's significant because yield spreads on our targeted assets are much wider now than they were back then. This new Series C preferred stock is rated A-, which, along with our existing Series A and B preferred stock carries the only NAIC 1 preferred stock rating in our sector.
Finally, after the mortgage REIT sector sold off in March, we repurchased common shares at highly accretive levels. This is exactly what we want to be doing. In addition to all the capital activity, we took further advantage of that window of stability in February by participating in our first non-QM securitization of the year at attractive economics. In contrast to the prior quarter, when we delayed a non-QM securitization for a few months until we were happy with execution levels, in the first quarter, we pushed to come to market quickly, just 6.5 weeks after a prior non-QM securitization, while the securitization markets were still strong. We were able to price the AAA tranche at a spread of plus 150 to the curve, and we achieved an overall cost of funds of under 6%, which enabled us to lock in very high returns on equity on the tranches we retained.
The majority of the non-QM loans sold into these 2 securitizations were originated by LendSure and American heritage in which we have strategic equity investments. There's a continual dialogue and exchange of information between our capital markets desk and these originators. This feedback loop gives us input on the underwriting and great visibility on the credit profile of the loans, and it gives them the ability to originate loans that could ultimately be profitably securitized. We end up with a high degree of confidence in the quality of the collateral, and we believe that the risk-adjusted returns are extremely attractive on the retained tranches that we organically create.
I'm very pleased that we were able to get both our preferred stock issuance and our non-QM securitization completed in February, ahead of the risk-off movement that started in March and that has now enhanced our opportunity set on the asset side of the balance sheet. We've been strategic and selective in our deployment of the new capital so far. First, we allowed some repo to roll off, temporarily lowering our leverage pending full deployment. Second, we were active in March with share repurchases, as I mentioned. And third, we've added to our portfolios across some of our loan businesses, which this past quarter included the secondary market purchase of a portfolio of HECM buyout loans and what we believe to be distressed prices. I'll note that we finished the quarter with ample remaining dry powder to invest.
Our activity during the quarter translated into some concrete changes to our portfolio composition. Our reverse mortgage investment portfolio increased largely because of that distressed purchase of HECM buyout loans that I mentioned. But otherwise, the sizes of our agency and credit portfolios actually ticked down. The agency portfolio declined another 12% this quarter as we continue to rotate capital out of agency. However, those net sales all occurred in January and February, and we actually net added agency assets in March around the spread widening. Meanwhile, our credit portfolio declined by 5% sequentially, mostly in 2 sectors. First, we now have a smaller non-QM portfolio. The non-QM securitization in February cleared out a good portion of our loans on balance sheet at great levels.
In addition to that, with the securitization spreads again widening in recent weeks, the bid for non-QM loans from whole loan buyers has become relatively stronger. As a result, we've encouraged LendSure and American Heritage to sell more of their production to whole loan buyers and EFC's pace of acquisition has subsided. Of course, that could change at any time based on supply/demand dynamics.
Second, we now have a smaller commercial bridge loan portfolio. The commercial real estate sector has been dealing with a number of issues recently, including the impact of higher interest rates on property -- the impact of higher interest rates on property values and financing costs, lenders tightening underwriting standards, and now distress at the regional banking level. As a result, we have taken a somewhat more cautious approach in that sector, including continuing to focus on the multifamily subsector. We believe that the multifamily subsector is much more insulated from the impending credit contraction that so many are predicting for several reasons.
First, there is still an acute shortage of housing, which should support occupancy levels and rents. Second, fewer people can afford to buy homes given where mortgage rates are, that's driving more people to rent, who might otherwise buy. And third, is the GSEs who serve as the primary lenders for the multifamily space as opposed to the small banks and other private lenders who serve as the primary lenders for the other property types, like office, retail, and hotel. GSE and government support, which, by the way, also includes rent subsidies, doesn't come and go based on market sentiment, so sponsors should still be able to finance and refinance at appropriate levels in multifamily.
In addition to focusing on multifamily, we've also been tightening our underwriting criteria across all subsectors within commercial bridge, including lowering our LTVs. As a result, our pace of new commercial bridge loan investments has ratcheted back. At the same time, our existing bridge loan portfolio has a short duration. It's estimated weighted average life in March 31 was less than 12 months. One benefit of the short-term nature of these loans is that we can take action sooner when the property experiences problems. Another big benefit is that a significant portion of our loans continue to pay off each quarter. As a result of the steady payoffs in this sector and our slower lending pace, our commercial bridge loan portfolio has now declined for 3 consecutive quarters. Since midyear 2022, our commercial bridge loan portfolio has shrunk by 22% to $578 million, down from $744 million.
All that said, another reason we're being cautious and selective in the commercial mortgage sector is that we think the turmoil in the regional banking system could have an outsized impact on the commercial real estate market generally and create opportunities for us specifically. We estimate that small banks hold about 70% of commercial real estate loans across the banking system and further stress on their deposit bases could mean an opportunity for us to acquire some of these loans, especially nonperforming loans at deeply discounted prices.
At the same time, as these small bank lenders withdraw from the space, we expect to see an opportunity to provide capital at higher spreads on conservatively underwritten new originations. EFC has strong origination, underwriting, and workout capabilities, both in-house at Ellington and through our strategic equity investment in Sheridan Capital. As such, I think we are very well positioned to benefit from this approaching opportunity. Therefore I wouldn't be surprised to see our commercial mortgage loan portfolio increase in the not-too-distant future.
Putting it all together, our slightly smaller investment portfolio, larger balance of unencumbered assets and the significant growth of our equity base caused our recourse debt-to-equity ratio to decline to 2:1 at March 31, down nearly 0.5 turn from year-end. That's a meaningful decline. We finished the quarter with ample dry powder available to invest, as you can see from our cash and unencumbered asset figures. I think it's a great time to have that dry powder.
And with that, I'll turn it over to JR to discuss our first quarter financial results in more detail.
J. R. Herlihy
Thanks, Larry, and good morning, everyone.
For the first quarter, Ellington Financial is reporting net income of $0.58 per share on a fully mark-to-market basis and adjusted distributable earnings of $0.45 per share. These compare to net income of $0.37 per share and ADE of $0.42 per share for the prior quarter.
On Slide 5, you can see the attribution of earnings among Credit, Agency and Longbridge, each of which contributed positively to our first quarter results. The credit strategy generated $0.53 per share of net income driven by net interest income on our loan portfolios, net gains on our non-QM loans and positive overall earnings from unconsolidated entities, partially offset by a mark-to-market loss on our strategic equity investments in loan originators. We also had net losses on our interest rate hedges driven by the decline in medium and long-term interest rates quarter-over-quarter. Finally, despite continued low levels of credit losses and strong overall credit performance, we did see an uptick in delinquencies on our residential and commercial mortgage loan portfolios during the quarter.
Meanwhile, the Agency portfolio generated positive net income of $0.08 per share in a quarter when Agency MBS underperformed U.S. Treasuries. The mortgage basis performed well in January, but then widened beginning in mid-February and through quarter end. The widening was caused first by renewed anxiety over inflation and what the Fed's response would be and then in March by turmoil in the banking system. Agency MBS underperformance was most pronounced in sub-3% coupon; however, which we own relatively few of. Net gains on our specified pools exceeded net losses on our interest rate hedges and slightly negative net interest income driven by sharply higher financing costs. And we had an overall gain for the quarter in the agency strategy.
Moving now to Longbridge. During the first quarter, yield spreads in the reverse mortgage market actually tightened, which, combined with lower interest rates, increased the value of our HECM MSRs and our proprietary reverse mortgage loan portfolio. In addition, higher gain on sale margins more than offset lower origination volumes sequentially. So Longbridge also had a net gain in its origination business, which supports our adjusted distributable earnings. Beginning in late March, however, Ginnie Mae HMBS yield spreads began to widen, which could pressure again on sale margins. On the bright side, we're entering more seasonally active months for originations and Longbridge's market share continues to rise. In January, it actually hit #1 in newly originated HECMs.
EFC's net income for the first quarter also reflected a reduction in the fair value of our senior unsecured notes, which was driven by credit spread widening. This is included in unrealized gain loss net in the corporate other column on Slide 5.
Next, please flip to Slide 6. In the first quarter, our total long credit portfolio decreased by 5% sequentially to $2.43 billion as of March 31, driven by smaller commercial mortgage loan and non-QM loan portfolios. A portion of the decrease was offset by larger portfolios of residential transition loans and non-QM retained tranches.
On the next slide, Slide 7, you can see that our total long Agency MBS portfolio decreased by about 12% quarter-over-quarter to $853 million as net sales and principal repayments exceeded net gain.
On Slide 8, you can see that our Longbridge portfolio increased to $442.5 million as of March 31, driven by an opportunistic purchase of a portfolio of HECM buyout loans and incremental originations of proprietary reverse mortgage loans. In the first quarter, Longbridge originated $234 million across HECM and Prop, 77% through its wholesale and correspondent channels and 23% through retail. The share through retail increased from 15% in the prior quarter.
Next, please turn to Slide 9 for a summary of our borrowings. Our overall weighted average borrowing rate increased by 38 basis points to 5.21% primarily driven by higher short-term interest rates and also because at March 31, a greater proportion of our borrowings were secured by our loan and MSR portfolios, which carry higher borrowing rates and agency assets. Book asset yields for both our credit and agency strategies also increased over the same period, thanks to portfolio turnover, and we continue to benefit from positive carry on our interest rate swap hedges, where we net receive a higher floating rate and pay a lower fixed rate. As a result, net interest margins in both our credit and agency strategies expanded sequentially.
Our recourse debt-to-equity ratio decreased to 2:1 as of March 31 compared to 2.5:1 as of December 31. This decrease was driven by our smaller investment portfolio and increase in unencumbered assets and an increase in total equity quarter-over-quarter. Our overall debt-to-equity ratio adjusted for unsettled purchases and sales also decreased during the quarter to 8.9:1 as of March 31 as compared to 10.1:1 as of December 31. In January and February, we issued 4.4 million common shares through our ATM program at an average price of $13.64 per share net of offering costs. And in March, we repurchased 1.06 million common shares at an average price of $11.38 per share. Also in March, we replenished the repurchase program by adding $50 million in authorization. In addition, we issued 4 million shares of Series C preferred stock that priced at an initial fixed dividend rate of 85 days, which was a 513 basis point spread to the 5-year treasury.
Finally, at March 31, our combined cash and unencumbered assets totaled approximately $618 million, and our book value per common share was $15.10, up from $15.05 in the prior quarter. Including the $0.45 per share of common dividends that we declared during the quarter, our total economic return for the first quarter was 3.3%.
Now over to Mark.
Mark Ira Tecotzky
Thanks, JR. I'm pleased with EFC's results for the quarter. We had a total economic return of 3.3% in the period of extreme rate volatility. The 2-year note had a range of 130 basis points this quarter. First is market expectations of Fed behavior ping pong between more hikes and almost imminent aggressive cuts and then with the developments in the banking sector in March. Now we find ourselves in the middle of a potential full-fledged banking crisis with 3 banks seized and the liquidation of Agency MBS seized by the FDIC well underway.
Like most crises, if you hunker down and weather the storm, the future opportunities are great. It can be a short-term negative for current holdings, but a huge long-term positive for the going-forward opportunity set. This current crisis is shaping up to be no different. We think regional banks will significantly reduce lending in the commercial real estate market, which presents a huge long-term opportunity for EFC. We have vast experience and institutional knowledge about working out delinquent and undercollateralized commercial loans, having worked out tons of them in our time as a public company.
In regard to the ongoing sales of the FDIC's Agency MBS, we were and we remain well positioned for those sales with limited exposure to the coupons being sold. In fact, it turned out to be a great quarter for EFC's Agency MBS strategy as well as from many of our other strategies. I'll review what worked for us in the first quarter and what didn't. Then I'll discuss our outlook for the coming months and how we are positioned to capture the opportunities we expect to see.
Extreme rate volatility and FDIC liquidations of seized Agency MBS (inaudible) sound like a constructive backdrop for our agency strategy, we were able to generate a high-teens annualized gross return on equity in the agency. We have largely avoided the lowest coupons and the highest coupons and for the most part, that shield us from the technical effects of both bank liquidations and new production. We made positive carry on our long-specified pools versus short TBAs and a lot of carry-on pools versus SOFR hedges. With all the volatility, we saw lots of relative value opportunities in the quarter to add excess returns, including buying some pools in March at wide spreads. Even at its smaller size, we think that the agency strategy can continue to deliver outsized returns for EFC because spreads are wide, spread pool paths in many sectors are low, and much of our portfolio requires minimal delta hedging.
In our non-QM strategy, we were opportunistic. We did a securitization in February and what were some of the tightest spreads of the year. Now we see a lot of competition for loans from other investors who are just holding loans on their balance sheet. They are attracted to the high coupon relative to the price and strong historical credit performance. For the quarter, we also had excellent results from our non-QM retained tranches. Credit performance remains strong and slow prepayments were a big tailwind to many of our seasoned excess interest holdings.
RTL is now our largest portfolio allocation. Delinquencies were up modestly and loans are extending a bit, but overall performance of our portfolio remains very strong. Even though HPA has actually turned back positive recently, a year ago, in Q2 2022, home prices almost everywhere were higher than current home prices today. So on the vintage of loans that were originated 9 to 12 months ago at the top of the housing market, having completed the renovation of the home as they market the homes for sale, our borrowers are now having to cut prices relative to where they thought they would sell the house when they initiated the project. As a result, time on the market is extending a little bit and that's delayed the resolution of our loans in many cases, as we are seeing time to pay off extend.
So far, everything looks manageable, and home price drops have generally not been significant enough to impair our loans. We expect that time in the market will normalize from the aberrational short times we saw post-COVID, and we have built that into our underwriting. RTL has been a great strategy for us. The U.S. housing stock is old, but drastically in need of renovation, and we don't have to compete with the GSEs. The unlevered coupons we earn are high. The interest rate risk is limited and our performance has been excellent. I expect all of this will continue.
In commercial bridge, we have seen real estate values decline and financing dry out. But these effects have been felt most in property types where we are not as active. In office and retail, for example, which are about 15% of our portfolio combined, regional banks are the biggest lenders to the sector. Retail and office already had problems, but now the banking crisis is making it worse because it's hamstrung the largest pool of capital that has been supplying the lowest rate loans to these property types. As a result, some sectors will continue to adjust to lower valuations and higher cap rates and be disproportionately impacted.
What's interesting, you can see on Slide 6, is that our commercial mortgage portfolio has shrunk again in the first quarter. We have been highly selective on new opportunities, and we had $142 million in payoffs in the quarter.
As of March 31, our portfolio was 65% multifamily, as you can see on Slide 10. That sector has held up better and not coincidentally, the biggest lenders in that space of the GSEs. They're still active and open for business. You can also see on this slide that all of our commercial bridge loans are floating rate with SOFR at 5%, our borrowers have had a huge incentive to refine to fixed rate debt, and that is what is driving the payoff velocity.
We will have a few headaches in the portfolio, and I expect some challenges related to maturity days, but I think the real story for us is the incredible opportunity regional bank stress is creating for us. Recall that when we first started our commercial loan strategy back in 2010, it was focused on acquiring nonperforming loans and resolving those NPLs, generated a great ROE for us. The NPL opportunity dried up by 2018, and since then, we've done mostly bridge loan originations. The NPL opportunity is now coming back, and that's really exciting. As the large pipeline of maturing loans continues to come due, many will require new equity or mezzanine capital to come in as the new loans will be smaller than the maturing loans. That equity of mezzanine capital will not always be available. So we think that you're going to see more maturity defaults with many loans selling at big discounts to par and providing lots of opportunities for us.
You can see a preview of this in many CMBS conduit BBB tranches, some of which are down 25 to 30 points. That sector is starting to look interesting to us. As for new commercial bridge originations, we are sure to see a lot less competition from regional banks. Given their deposit base, they always had a lower cost of capital than EFC, so we really couldn't compete with them on rate. But now with those banks pulling back, we are starting to see better quality sponsors and better quality deals coming our way.
The other thing is our consumer strategy. That strategy returned modestly positive results in the quarter, but only small amounts invested. In recent years, we have reduced capital net strategy significantly. We just haven't been seeing compelling scalable opportunities. We also expect that to change with credit contracting.
Looking ahead, I think we have fantastic prospects for the remainder of the year. Housing, while still expensive, has repriced slightly lower, Fed rate hikes may be over or close to over. Our agency strategy is making significant earnings contributions again. Agency spreads are really wide right now, so we think to a significant net interest margin to capture. For non-QM, while there is competition for whole loans, new issue securitization volumes are down, so I expect we will be able to replicate that very strong execution we had on our Q1 deal.
In Commercial Bridge, our portfolio is holding up well, and our decision to increase our CMBX credit hedges in recent quarters has also really paid off. We can now redeploy that capital at lower LTVs, lower property values, and stricter underwriting in today's market, which is decidedly less competitive. I also think there's a good chance we're going to see the opportunity to deploy more capital in our consumer strategies, either in auto or unsecured consumer. And in anticipation of future regulation and investor scrutiny at the regional banking level, we expect their lending appetite in the commercial and consumer sectors to come down significantly, which should present opportunities for EFC.
Now back to Larry.
Laurence Eric Penn
Thanks, Mark. I'm very pleased with Ellington Financial's strong performance to start the year in a volatile market, no less. In the first quarter, we added capital and lowered our leverage while also growing net income per share, adjustable distributable earnings per share and book value per share. We expanded our credit and agency net interest margins. It's nice to see our ongoing portfolio rotations translate into NIM expansion.
With the recent volatility around the banking sector, I'll highlight a few areas of the portfolio and balance sheet where we've been particularly focused. Our first area of focus is loan performance. The credit performance of our loan portfolios continues to be strong, but we are beginning to see delinquencies tick up in both the residential and commercial portfolios. Actual credit losses continue to be extremely low in our portfolios, however. And thanks to our focus on first liens and low LTVs in both our residential and commercial mortgage portfolios, I expect actual credit losses to continue to be low.
Second area of focus recently has been monitoring the health of our counterparties and our exposures to those counterparties. A core tenet of our liability management is to diversify our lending relationships and not to concentrate risk in any one counterparty.
That's why you see on Slide 23 that EFC currently has 27 counterparties. Our objective is to get ahead of any concerns with particular counterparties. And for that, we leverage our Ellington's counterparty review function. As further financing diversification and to lock in long-term financing, we also make extensive use of the securitization markets. We've also tapped the unsecured corporate bond market in the form of our senior notes.
Third area of focus has been capital management, where we have been opportunistic issuing capital when the markets are open, and we've repurchased stock during sell-offs. As it pertains to repurchases, we balance their accretive effect on book value per share against the attractiveness of the investment opportunities available in the market, together with the effect on their expense ratios and the liquidity of our stock. We signaled before that as long as our liquidity is strong, we view repurchases as particularly attractive whenever our price-to-book ratio falls below 80%, and that's indeed where we transacted our repurchases this past March.
Looking forward, market volatility and forced selling has historically generated exciting opportunities for us. I discussed earlier how the turmoil in the regional banking sector could lead to opportunities in nonperforming commercial mortgage loans.
As you can see on Slide 11, we are fortunate to have loan origination capabilities in a wide variety of sectors. Whichever sectors get hit hardest by a contraction of credit, any one of our lending businesses could benefit from the resulting lending void. While it's great to come off the first quarter of strong earnings, it's even better to come off that quarter with low leverage and dry powder, which position us well to take advantage of the opportunities that I think we'll find as the year unfolds.
On a final note, I'd like to remind our investors that our annual meeting is coming up next week, on Tuesday, May 16, and we encourage you to please vote on the matters in our proxy statement, if you have not done so already.
With that, we'll now open the call up to questions. Operator, please go ahead.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from Crispin Love with Piper Sandler.
Crispin Elliot Love
Right now it seems like there's -- there are a lot of opportunities to grow EFC's agency exposure, just given wide spreads right now and patience on the credit side. So over the near term, do you expect to increase EFC's agency equity and asset allocation? And then what levels would you be comfortable increasing agency to for capital and asset levels?
Mark Ira Tecotzky
Crispin, it's Mark. It's a great question. So I would say right now, we're probably comfortable with the capital allocation we have in the agency space. As I mentioned in my part of the prepared remarks, agency spreads are wide, but they're wide for a reason, right? You have this steady drumbeat of sales going on as the FDIC has their agent selling off the portfolios they've seized. So I think what you're going to see on the agency side is wide spread and capture of net interest margin. But I'm not sure you're going to see significantly -- significant spread tightening. And we are really constructive on the opportunities we see on the credit side. We view increased regulation on regional banks as creating a significant high-yielding opportunity for a lot of our lending businesses. So right now, I'd say we sort of like the balance we have between agency and credit.
Laurence Eric Penn
That said, I just want to add, Mark. I mean, if all of a sudden, you see something going on in agencies where we have so much dry powder now, right, that say, if it's not matched and what we're seeing in credit, we at only 10% now at quarter end in terms of the agency allocation, we could easily increase that a few percent, which would translate into several hundred million of assets if we thought the opportunity was right.
Crispin Elliot Love
And then just kind of following up on that in the meaningful dry powder that you have available and you expect the asset sales from banks to come. Other than some of the bank failures out there, have you seen banks in the market yet selling loans at levels that you might be interested at or still too soon to tell right now? And then kind of your expectations of what types of sectors you'd be most interested in buying loans from banks, I guess, what types of commercial sectors, I presume?
Mark Ira Tecotzky
I still think it's early stages. But I think there's a clear catalyst to create volume, right? And the catalyst is going to be maturity date. We're at least on the commercial side, our expectation is you're going to have a lot of properties that are fine properties. But the current interest rates versus the current operating income isn't going to support a refinanced loan as large as the existing loan. And so that's where you get into the situation where people have to put in new capital or there's maturity default. And that's where I think we're going to see a lot of opportunities. So it will start coming up. I think we're a little bit early still. And we mentioned, we think you can see opportunities on the consumer side, right? Like credit unions have been really active on the consumer side, in unsecured consumer, and in auto loans for the past several years. Their cost of funds have gone up. They're having to pay more for deposits. We think they're going to be less aggressive in growing their loan portfolios given the uncertainty they have. So it's another area where I think there's going to be potentially good opportunities for us.
Laurence Eric Penn
We haven't seen loans really come out yet. I mean it's the typical cycle where first, you're going to see the most liquid security sold. We've already seen some of those come out managed by third parties on behalf in some cases, the government. And we understand that -- and then it'll get some of the less liquid securities. And then finally, on the loan side, my understanding is that in terms of who's going to be managing those loan sales, that's still being worked out, and we haven't seen any -- anything have come out, but it's going to come out.
Operator
Our next question comes from Trevor Cranston with JMP Securities.
Trevor John Cranston
You guys mentioned that you made a distressed purchase of HECM buyout one this quarter. I was wondering if you could provide some more color there. If that was sort of a one-off opportunity or if you think there's going to be more opportunities to deploy additional capital into the reverse space in coming quarters?
Laurence Eric Penn
Yes. So this was related to a bankruptcy that occurred late last year in the reverse mortgage space. And so we actually -- those loans were financed. We actually bought that package that was seized essentially from the lender. So -- and I think there could be absolutely more of that product coming out, both from that bankruptcy, especially from that bankruptcy in particular, because all the product has not come out at this point. So you could see us add to that. I don't see it necessarily as a recurring business because this was -- this bankruptcy was obviously an important event in the reverse mortgage space. But yes, so it was a great -- we were in a great place, having the dry powder back. This was in the fourth quarter, but I believe it closed in the first quarter. So yes, it's just -- so a little more of a one-off opportunity, but there could be a follow-up purchase related to the same original company that had bought out those loans in the first place.
Trevor John Cranston
And then in general, it sounds like you guys think there could be a pretty significant opportunity to deploy capital in coming months. Obviously where your stock is today doesn't necessarily make sense to raise capital through that avenue. I was curious, there are some other smaller mortgage REITs who trade at pretty distressed levels. So I was curious if you could comment on if it potentially make sense for EFC to look at gaining some scale and additional capital through potential acquisition of another company or how you think about that?
Laurence Eric Penn
Yes. As usual, we're not going to comment on potential M&A activity. But sure, if we have the opportunity to grow in a way that made sense, yes, you're absolutely right. It doesn't make sense to be issuing stock at wherever, we are at $12 and change per share. In fact, closer to buying back stock, as we said at those levels, sub-$12 like we did in the first quarter than issuing. But sure, I think that absolutely scale is important, especially as we see this potential crisis unfolding, and we see lots of opportunities in so many different sectors. So we want to be opportunistic on all things, whether it's M&A activity, stock repurchases, stock issuances, buying assets, all of the above, flexibility is important.
Operator
(Operator Instructions) Our next question comes from Lee Cooperman with Omega Family Office.
Leon G. Cooperman
Just listening carefully, it seems that your profitability should be increasing. And do you agree with that, given the stressed credit environment, number one? Number 2, back, I guess, in 2014, the dividend was over $3 a share. The dividend currently runs about $1.80. What's the prospect of a dividend increase given the outlook that you have for the business? And to attach to that, what kind of sustainable ROE do you think you could generate the way you want to run the business?
Laurence Eric Penn
Thanks, Lee. Great to hear from you. So first of all, I would say our dividend right now is at around 12% annualized return on equity, obviously, is what that implies and that's net of our expenses, of our G&A and whatnot. I think that's a good number going forward. In terms of the dividend increase, I'll sort of say -- I'll continue to say what I said in the past is I just think that we like where the dividend is. Obviously we've had it consistent at $0.15 for a very long time now. Not such a bad thing to increase book value per share as well. But I think if I were to say like, okay, there's going to be a move at some point upward or downward, I would say, the next move, I'm certainly expecting and hopeful that it will be upwards rather than downwards.
Leon G. Cooperman
But what's the conditions that led to a $3 dividend back in 2014?
Laurence Eric Penn
Wow, you're stretching my memory. I guess, first of all, I'm going to guess that our book value per share was probably $23, probably 50% higher. So like -- so that sort of normalized would maybe put you down more towards $2. So it's really not that different. We'll have somebody check on that as we're talking. But -- so look, like a lot of -- and I think we've done so much better on this than the rest of the peer group. But look, REITs pay out their earnings by and large. And when their dividend exceeds their earnings, which has happened to us in a couple of years, most notably, frankly, last year, and I believe 2016, I'm trying to remember. But we're going to have some book value degradation. And we haven't had that much, I think, in the context of things over many, many years.
You can see on Slide 20, let's see, at 25, kind of the progress of our book value and dividends over time and the fact that we've been able to achieve 8.5% annualized when LIBOR probably averaged, maybe it was 2% over that time period. So I think the book value degradation has been very, very contained and we've never had to do a reverse split, like you've seen so many others do. Yes, I've been told on Sep 30, 2014, $23.78 a share, as I thought, so 50% higher. That's more than 50% higher. So it's normalized actually pretty close, right? $3 out of $23 is -- what is that, 13%? I mean it's -- yes, it's pretty close. Yes, little less than 13%, yes. Well, again, Lee, thanks for your support. It's always great to hear from you.
Operator
We'll take our next question from Doug Harter with Credit Suisse.
Douglas Michael Harter
Can you just talk about what are the conditions you're looking for to maybe be a little bit more on the offense as far as adding assets versus kind of the risks that you laid out that especially in the commercial real estate side that's led you to kind of shrink for the past 3 quarters?
Mark Ira Tecotzky
Hello, Doug, it's Mark. I think we need to see the assets come out, right? So it's been pretty clear between Signature, Silicon Valley Bank, what assets the FDIC took over, and they have a third-party agent now selling the agency MBS portion of it. They've sold some of the non-agency RMBS securities as well. But no, there's a lot of commercial loans that haven't come out yet. There's a few other sectors that haven't come out yet. So those sectors will come out. And I also think -- so that's one thing. That's sort of like a catalyst for sales that we hope we'll participate in, and we hope assets will come at levels that will be accretive to our performance. There's that.
And the other side, which is more sort of the slow burn, just as you get this wall of maturity on the commercial space, we think banks that have previously made commercial loans are going to be pretty tough on the terms at which they're going to roll. We think that's going to create another opportunity for us. So we brought the leverage down a little bit, but some of that was just a function of the preferred deal we did. We are continuing to make new investments. I just -- the view that it's good to have some dry powder because there's a clear catalyst for assets to come out at levels that have the potential to be materially cheaper than where they've been in the last couple of years. You have the Fed balance sheet is shrinking. And there's 2 giant pools of low-cost capital out there. It's the Fed and it's banks, right? The Fed is clearly shrinking. We expect that to be ongoing. And banks -- at least banks $250 billion and smaller, we think they're going to also be spending a lot of time to getting their house in order and are going to be less interested in the origination. So that combination of factors, the known securities we know are going to come out by the FDIC. That's one thing. And just that banks are going to be less aggressive, we expect on the lending side. Argues for us that we're going to see a lot of investment opportunities. We're just waiting for them to come out. We're ready now. It's not as though we're waiting for something to happen in the economy or some statement from the Fed. It's just when assets come out that are interesting to us, we plan on -- we plan on participating.
Operator
Our next question comes from Bose George with KBW.
Bose Thomas George
Can you talk about the liquidity risk related to repurchasing HECM loans based on their LTV? How does that risk manage? And what kind of drives that? Because I assume that was kind of the issue for this bankrupt portfolio that you purchased, right?
Laurence Eric Penn
Right. You're not talking about the liquidity risk, having bought them in the secondary market, right?
Bose Thomas George
Yes, just managing the liquidity of having to buy them and sizing that potential based on LTV.
Laurence Eric Penn
Sure. Yes. So the portfolio of that particular originator that went bankrupt, they had a very, very old portfolio. They have been originating -- they have been in business much longer than longer. So longer is portfolio of the loans that it originates and securitizes. And you're right, when those loans hit 98%, they get bought out from the pool. So that's -- it's a trickle in terms of -- because, again, Longbridge portfolio is so much younger. And the other thing that was going on, frankly, with this other originator, I don't want to get into too many specifics about their processes, but they actually instead of filing claims with the FHA when they could with these buyouts, which would have cleared the loans off the decks and off the balance sheet and freed up capital, they -- really, it seems made a conscious decision to sort of continue to earn, try to earn positive carry on those assets and hold them on balance sheet, and that just turned out to be a big mistake.
So if they had -- we would not -- let's put it this way, we would not plan at Longbridge to have that as a strategy where we could be filing claims with the FHA and recirculating that capital as opposed to holding on to those assets for longer in the hope of earning positive (inaudible).
Bose Thomas George
And then just in terms of what's Longbridge's share of the reverse mortgage market? And then in terms of your capital allocation there, where could we see that go?
Laurence Eric Penn
Yes. So it's in the low 20s, correct, I believe, is the -- is their market share, which is -- I think JR mentioned, they hit #1 in January, although I think there -- I think more correctly described as #2. I mean that was just one particular month, I think, right? But yes, so they have #2 market share and low 20s percent and growing. And then in terms of capital allocation, the -- maybe you could comment on that in terms of where that stood at quarter end?
J. R. Herlihy
Sure. It was 12% at quarter end.
Laurence Eric Penn
Of total equity.
J. R. Herlihy
Of total equity, right. And that's driven by the portfolio grew quarter-over-quarter as we discussed because of the second buyout acquisition, also prop grew on the margin. So as we hold those assets on balance sheet and actually takes capital allocation. In terms of where that could go, I think, in the team that we're opportunistic, right? So we're not so specific on where we're going to be deploying capital at a given time, but we saw opportunity there this quarter. We deployed 10% to 15% is probably a good range, think about going towards.
Laurence Eric Penn
And that could even tick down just because we've basically made the conscious decision. It doesn't -- the financing lines that we have right now for, I believe, whether it's those HECM buyout loans or the prop loans, which is also a growing portfolio, too. It doesn't -- we get the same rates, whether we hold those at Longbridge or back up at the REIT, if you will. So we're actually talking about moving them up to the REIT. We may do that very soon. And that you'll see it tick down, right? You'll see the -- when that happens, you'll see the equity in Longbridge tick down. So I think -- and we love these prop loans. We think they are just terrific assets. HECM buyouts, again, maybe not a recurring business, but we got them at distressed prices.
So I think you could see some shrinkage there. So I think it's a better way to look at it in terms of just the total equity at Longbridge would be to think of more the origination business itself, right? And for that, the longer just capital that supports the origination business and their MSR, right? They have this big MSR asset. Mostly the HECM MSR asset, right? And then they also have some prop MSR as well. But -- so that's an asset, which, again, we could also explore moving not the MSR per se, but we could explore moving an excess servicing rights similar to what you've seen in other structures where you've got the mortgage servicing right, held by the regulated licensed entity and then it issues and sells an excess servicing right up to the REIT. So that's another -- it'd be a little more complicated to do that with reverse mortgages, but we do think we have a path to that. That would also reduce actually by quite a bit the equity investment, if you will, or at Longbridge.
So yes, there's ways for us to manage that. And again, we sort of think of most of the equity investment at Longbridge now as consisting of yield-bearing assets, whether it's the MSRs or the loans themselves.
J. R. Herlihy
Yes. And maybe just one last thing to add to that. I think the way to think about the capital supporting the origination business is, say, 1% of the [UPB] of -- 10 basis points of UPB of the HECM, so [$8.80] billion to support that business would be -- right, the [GMA] requirement for MSR. So that would be 6% of our capital and then everything on top of that…
Laurence Eric Penn
Right. So that's true. That's kind of a floor. That's a good point. The Ginnie Mae requirement of 10 basis points on what you see on the balance sheet in terms of the -- really the HMBS issue, you can see is that's going to be a floor. So currently in that $80 million range on what we could -- if we really stripped a lot of assets…
J. R. Herlihy
Right -- yes, 1%, sorry, 1%.
Laurence Eric Penn
Yes, look, the other one is the cash requirement, right.
Operator
That was our final question for today. We thank you for participating in the Ellington Financial First Quarter 2023 Earnings Conference Call. You may disconnect your line at this time, and have a wonderful day.
