Chimera Investment Corp (CIM) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Earnings Conference Call for Chimera Investment Corporation. At this time, I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode.

(OPERATOR INSTRUCTIONS)

This earnings call may contain forward-looking statements within the meaning of the Section 27(a) of the Securities Act of 1933, and Section 21(e) of the Securities Exchange Act of 1934.

Forward-looking statements, which are based on various assumptions some of which are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology such as may, will, believe, expect, anticipate, continue or similar terms, or variations on those terms, or the negative of those terms.

Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors including but not limited to our ability to obtain financing arrangements, general volatility of the markets in which we invest, interest rate mismatches between our mortgage loans and mortgage-backed securities and our borrowings used to fund such purchases.

Changes in interest rates and mortgage prepayment rates, effects of interest rate caps on our adjustable rate mortgage-backed securities, rates of default or decreased recovery rates on our investments, prepayments of the mortgage and other loans underlying our mortgage-backed or asset -- other asset-backed securities.

The degree to which our heading strategies may or may not protect us from interest rate volatility, changes in governmental regulations, tax law and rates and similar matters, availability of investment opportunities in real estate-related and other securities, market trends in our industry, interest rates, the debt securities markets or the general economy.

For a discussion of the risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, the risk factors in our prospectus dated November 15, 2007, filed with the Securities and Exchange Commission.

We do not undertake and specifically disclaim any obligation to publicly release the result of any revisions, which may be made to forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

I would now like to turn the conference over to Mr. Matthew Lambiase, Chief Executive Officer of Chimera Investment Corporation. Please go ahead, sir.

Thank you, and welcome to the Fourth Quarter Earnings Call for Chimera Investment Corporation. I'm Matt Lambiase. I'm the CEO and President of Chimera. Joining me on the call today are members of the senior management team, CFO, Alex Denahan, our Head of Investments, Chris Woschenko and our Head of Underwriting, Bill Dyer. We are here to review the results of our short first period of operation.

But before we start, I just want to make a few important general comments. First, I want to begin our first call by repeating who we are. Chimera is a newly formed specialty finance company that invests in residential mortgage loans, residential mortgage-backed securities and real estate-related securities. We evaluate and manage credit risk. Our principle objective is to manage credit risk in order to generate net income for distribution to our investors.

Because our focus is on generating income for our shareholders, we have elected to be taxed as a real estate investment trust. We are externally managed by the Fixed-Income Discount Advisory Company, or FIDAC. FIDAC is a registered investment advisor and is a wholly owned subsidiary of Annaly Capital Management.

Second, as I said before, our fourth quarter results are a little more than a stub first period. We closed on our IPO on November 21st, thus our results reflect just the beginning of our ramp-up period, essentially what we earned on our cash for our first 39 days of operation.

Third, as we discussed in our offering process, our ramp-up period should take up to six months. I believe we are making progress toward achieving that goal. We see attractive opportunities in both loans and securities, and we have already begun investing.

During our call today, we will -- we won't be able to discuss very many details about our investing and financing activities beyond what we have disclosed in our earnings release and our public filings.

I hope everyone can appreciate the residential whole-loan and non-agency MBS markets are very competitive and negotiated markets, thus during our ramp-up period while we are actively buying assets, we prefer not to get into too many specifics of our activities. Doing so may hurt our ability to source assets effectively.

So during the call -- so during our discussion today, any comments on the market will tend to be more macro in nature. In short, our goal today is to introduce ourselves, familiarize you with the structure and presentation of our financial results in order to help you with your analysis going forward, and also to set a precedent for quarterly earnings call by the company.

With that, let me hand it over to Alex, who will give a brief review of our financial results for the quarter.

Chimera reported core earnings for the period commencing November 21st and ending December 31st of $1.3 million, or $0.03 per average share available to common shareholders. Core earnings is a non-GAAP measure and is defined as GAAP net income or loss excluding non-cash equity compensation expense and excluding any unrealized gains, losses or other items that do not affect realized net income regardless of whether such items are included in other comprehensive income or loss or in net income.

Core earnings are a close approximation for taxable earnings out of which we pay our dividends. We declared a dividend for the period of $0.025 per share. As opposed to core earnings, we reported a GAAP loss for the period of $2.9 million, or $0.08 per average share available to shareholders.

The difference between the Company's core earnings and GAAP results is related to the Company's accounting policy for hedging instruments. We have opted not to apply hedge accounting to our interest rate swaps under FAS 133. As a result, unrealized gains and losses on hedging instruments are reflected in current-period earnings rather than in other comprehensive income. We believe this election will have no effect on distributable earnings.

At December 31st, the Company's portfolio was comprised entirely of high credit quality mortgage-backed securities and residential mortgage loans. At December 31st, our mortgage-backed securities portfolio was comprised entirely of AAA rated securities, with a weighted average coupon of 6.32% and a weighted average purchase price of 98.7.

Our mortgage loan portfolio was composed of high quality, recently originated residential mortgage loans, with a weighted average coupon of 6.36%, a weighted average purchase price of par 0.6 and had no delinquent loans.

In aggregate, our portfolio at December 31st was largely composed of adjustable rate mortgage-backed securities. Adjustable rate mortgage-backed securities were 81.8% of the Company's portfolio. The balance of the portfolio was comprised of 5.7% fixed-rate mortgage-backed securities, 3.8% adjustable rate mortgage loans and 8.7% fixed-rate residential mortgage loans.

At December 31st, the Company had entered into interest rate swaps with a notional amount of $1.2 billion. The purpose of the swaps is to mitigate the risk of rising interest rates that affect the Company's cost of funds.

At December 31st, the Company had approximately $270 million in reverse repurchased agreements on with a weighted average repo rate of 5.02%. The weighted average days to maturity is 22 days. Finally, at December 31st, the Company had a common stock book value per share of 14.29.

Great, thank you Alex. As I stated earlier, we won't be able to discuss very many details about our investing and financing activities beyond what we've disclosed in our earnings release and to our public filings. This market is very competitive, and we're still in our ramp-up stage, still negotiating agreements and purchasing assets, and our responses to any questions would be very limited at this time.

With that in mind, Operator, why don't we open up for questions?

Thank you, sir.

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Our first question comes from the line of Steve Delaney of JMP Securities. Please proceed, sir.

Thank you. Good morning, everyone.

Hi, Steve.

Congratulations on getting the portfolio cranking up here.

Thank you.

Nice start. Can I just ask a couple of things about the RMBS portfolio? Alex, I didn't start writing when you started talking. What was the WAC again on the RMBS?

6.32.

Okay. Thank you, and I got the one on the loans. Okay. The $1.1 billion, it appears that maybe 27%, 30% of those trades actually settled by the end of December, and based on the repos that were on the books versus the payables. So, should we assume that the other purchases will settle during the month of January?

Yes.

Okay. And then obviously, it's mostly ARM [up-paper]. I was just wondering if you could comment on the particular types of ARMs in general that are underlying that. I -- was it primarily just like 5/1 hybrids, that type of thing?

Yes. It's primarily 5/1 hybrids.

Okay. And all AAA so far?

Yes.

Okay. All right, very good. And the swaps, I was wondering Alex, can you share with us what the average fixed pay rate was on your $1.2 billion?

404.

Okay. Very, good. And then, that's it for the housekeeping. I guess just wondering if on the Annaly call this week, there was a discussion about the GSE -- possible GSE changes. And I think just from a standpoint of incremental supply and opportunity, Wellington seemed to express that from Annaly's perspective, an increase there would be viewed as a positive.

And I was just curious on that if you could comment, since 75% of your investment strategy was going to be on -- primarily on prime jumbo paper, how do you guys see the trade-off between having that GSE execution avenue vis--vis possible yield compression that might come on at least everything beyond the super jumbo level? Thank you.

Well, I think that GSE, obviously the added liquidity to the market would be a very good thing. I think it would be a very good thing for us and our portfolio. As we ramp up, we'd be able to securitize and more efficiency fund our loans, and the great thing about the prime jumbo markets, it's very large. And I think from that aspect, I think we'll be able to source assets effectively, and the extra liquidity is very welcome.

So, you're thinking that if -- even if the liquidity is definitely a plus and even if there was, say, more competition for say loans up to 700, do you feel there's -- in the super jumbos segment of the jumbo market, do you think there's plenty of paper there for you to meet your target?

It's an absolutely giant market.

Yes.

And we're operating a relatively small portfolio in a very large, deep liquid market.

Okay, thank you very much.

Thank you.

Our next question comes from the line of Ken Bruce of Merrill Lynch. Please proceed, sir.

Thanks. Good morning, everyone.

Hey, Ken.

It looks like you're ramping up the portfolio quite nicely, and I understand that you don't want to discuss the specifics. Maybe you would mind giving us a little bit of insight into your hedging strategy. It looks like you're ultimately hedging a fairly significant portion of the portfolio today, just wondering what you're thinking going forward.

And separately, given your election not to implement FAS 133, are you still planning on implementing FAS 157 and 159 going forward?

Well, I -- I'll have Chris talk about the hedging and Alex talk about the accounting, and I will say that in our next earnings call, we will talk about our portfolio and our financing activities in detail. But until we're more fully ramped up, I think it's just not in the best interest of our shareholders to let everybody know what we're doing.

I understand.

As far as the hedging goes, we're doing what we told everybody we were going to do. We're hedging them asset by asset, and I think we're going to continue to do that. We're trying to mitigate the interest rate risk to the extent we can. Spreads on this kind of stuff as a [market reality] tend to widen out a little bit so as we said, we're tending to stay a little bit long. But --.

Long duration.

Long duration, yes. And depending on how speeds come in over the next few months, we'll determine how long or short we are. But, I think that that's what we're going to continue to do. We're not looking to call the market and trade interest rate risk.

So, you would intend to keep a hedge ratio similar of what you have today just depending on what prepay information and rate information you were --?

Yes.

Getting from the market?

Yes.

Okay.

And then, we'll adjust it as we need to.

Okay. And as to 157, of course, we're still evaluating it. But essentially, the marks on the swaps -- on the portfolio, it's marked externally as it is by the counter-parties to the swap agreements, and the valuation of the swaps would not change under 157 versus what we are currently using.

Yes.

So, the net market value of the swaps would not change.

Yes. I guess what I'm trying to get at is, do you intend to -- or maybe take the flip side of that. Are you expecting to see GAAP earnings volatility? And, are you willing to entertain that volatility knowing that you're really managing towards core? Just trying to get a sense as to whether you're going to try to implement any strategies on the accounting side that would reduce that GAAP earnings volatility?

Honestly, we're not going to try to manage that GAAP volatility. Core earnings is a very good proxy of distributable earnings, which is essentially what you buy this strategy for. You're looking for a dividend with us. So, yes, our GAAP volatility may increase as market values on the swaps move around.

But, I believe the investor base understands that what they're really buying this strategy for is a dividend, and core earnings will reflect that dividend. It does not affect our taxable earnings in any way. And so, it's just really -- it's an education with the investor, and I think our investors can understand that difference.

Great, thank you.

Thank you, Ken.

Our next question will be from the line of [Stephen Laws] of Deutsche Bank. Please proceed sir.

Hi, good morning. Congratulations on closing out your first period as a public company.

Thank you, Stephen.

A number of my questions have been answered, and I know you just stated you don't want to get too much specifics on the portfolio. Can you maybe just talk about, more in general or from a higher level, any changes you've seen in underwriting standards or the new paper being originated since you guys first began looking at new mortgages three months ago versus today?

Yes. I think we'd like to talk about that, and I'll turn it over to Bill Dyer, who's the Head of Underwriting for [the Company].

Great.

Hi, Steve. We've seen a very definite, very significant increase in the credit tightening, the loan to values, the credit scores, minimum credit scores, loan -- the assets, verified assets, the documentation levels on the files, practically all full documentation loans where the customer has to verify their income and the assets and the liquid assets after the down payment to purchase the house.

Have you guys seen an increase in volume as well? Are we seeing origination volumes, as a whole, come back or at least in the jumbo and -- markets that you're looking?

I'd say visible volume is about the same, I think, a reasonable portion of what's being originated is being held in the portfolio. So, while you're seeing it -- no trade or clear on the street, it's available for sale. Just it's -- like I said, it's just not very visible.

Great. Thanks a lot, for the color.

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Our next question is from the line of [Douglas Harter]. Please proceed.

Thanks. Just wondering if you could talk about the impacts of a steeper yield curve on your ability to -- on new assets you add?

Sure. I think it's an important distinction to make between how Annaly generates its income, which is on the slope of the yield curve. And Chimera is -- the driving force between Chimera's earnings will come from mortgage credit risk.

It's our intention to build a portfolio and to hedge out the majority of the interest risk in the portfolio and thus, the driver of the earnings will come from the mortgage -- the spread that we're going to get from mortgage credit risk. So, I guess the short answer is that the steeper yield curve, while it's not a nice thing, is not the prime driver of earnings for Chimera's portfolio.

All right, thank you.

Okay.

Our next question is from the line of Bose George of KBW. Please proceed, sir.

Good morning.

Hello.

I just wanted a clarification the capital deployment. Are you guys planning to fully deploy your capital into securities first, and then redeploy it into the loan book as that ramps up more fully? Or, are you going to remain somewhat underlevered until the loan portfolio is fully ramped up, just in terms of running our models, especially for the first quarter?

We've told investors that we were going to build a portfolio. It was going to take us six months to build out our portfolio. On the road show, we told investors that we were going to have a portion in securities and that that portion in securities, we would ramp up in probably the first two months of operation.

Yes.

And with the rest of the portfolio, the raw loan part of the portfolio will be ramped up over a six-month period.

Okay.

So, I think what you're seeing is us executing that strategy.

Okay, makes sense. And just a broader question on what you guys are seeing in terms of the securitization market, do you think it's possible to do securitizations now? Do you feel the environment has improved at all over the last couple of months?

Yes. There's a market for the senior securities, and I -- and if need be, we -- I feel pretty confident that we could securitize our assets. It's just, I think spreads are still pretty wide, and I don't know that we would really want to do it at these kinds of levels.

Yes. It probably would make sense for us to hold -- aggregate a portfolio, and I guess our view is that the securitization market comes back some time in the next couple of months and funding would be better for us and then we can securitize.

Great, thanks. And congratulations, getting off to a good start.

Thanks, Bose.

If there are no further questions, I will now turn the conference back to Mr. Lambiase.

Well, thank you, everybody for coming to our first call. We're all very excited, and we look forward to having many more calls with you in the future.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-286-8010 or 617-801-6888 with an ID number of 87979744. This concludes our conference for today. Thank you all for participating, and have a nice day. You may now disconnect.