Chimera Investment Corp (CIM) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter Earnings 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. At the request of the Company, we will open the conference up for question and answers after the presentation.

This earnings call may contain certain forward-looking statements within the meaning of 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 validity of the markets in which we invest; interest rates mismatches between our mortgage loans and mortgage-backed securities and borrowings used to fund such purchases; changes in interest rates, mortgage prepayment rates effects of interest rate caps on adjustable-rate mortgage-backed securities; rates of default; decreased recovery rates on our investments; prepayments of the mortgage and other loans underlying our mortgage-backed or other asset-backed securities; the degree to which our hedging strategies may or may not protect us from interest rate volatility; changes in governmental regulations, tax law and rates and similar matters; availability and investment opportunities in real estate-related or other securities; market trends in our industry; interest rates of debt securities; markets or general economy.

For a discussion of risks and uncertainties which could cause actual results to differ from those contained in forward-looking statements, see Risk Factors in our most recent Annual Report Form 10-K and all subsequent quarterly reports on Form 10-Q. We do not undertake and specifically disclaim all obligations to publicly release the result of any revision which may be made in any forward-looking statements to reflect our current 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, Carol. This is Chimera Investment Corp.'s Third Quarter 2008 Earnings Call. I'm Matt Lambiase. I'm the President and CEO and joining me today on the call are Alex Denahan, the Company's CFO, Chris Woschenko, the Head of Investments, Bill Dyer, our Head of Underwriting, Wellington Denahan-Norris, the CIO of FIDAC, and Jay Diamond, the Managing Director of FIDAC and Chimera Board Member. I'll make a few brief comments, have Alex review the financials of the quarter, and will take questions afterward.

As everyone now knows, the financial markets in the third quarter of 2008 were extremely difficult to navigate through. The quarter started out with investors losing confidence in the stocks of Fannie Mae and Freddie Mac, which eventually led to the seizure and conservatorship by the US Government.

Lehman Brothers filed for bankruptcy and AIG needed to take an emergency loan from the US Treasury in order to avoid collapse. Washington Mutual, Wachovia, and Merrill Lynch were all hastily merged with larger banks and even Goldman Sachs and Morgan Stanley succumbed to intense market pressure and chose to become bank holding companies, accepting more regulation and less leverage.

Also during the quarter we saw several money market funds break the buck, industrial companies have difficulty rolling their commercial paper, and LIBOR spike up dramatically. The US Treasury and the Federal Reserve Bank responded aggressively to the financial crisis by lowering interest rates, increasing liquidity programs, buying commercial paper, and initiating an unprecedented $700 billion TARP program to buy mortgage assets and preferred equity in financial institutions.

During this turbulent quarter, we witnessed significant illiquidity and much forced selling in the fixed income markets, resulting in significant downward pricing pressure. Consequently, Chimera's mortgage assets dropped materially in value and we took appropriate action. We sold assets and unwound interest rates swaps in order to reduce the Company's leverage and risk position. These actions resulted in a realized loss of $123.5 million.

Each successive quarter this year has become increasingly more difficult. The fourth quarter has the potential to be very challenging as well. The recent raft of downgrades of mortgage-backed securities by the rating agencies will most likely cause new selling pressures now from insurance companies and mutual funds as their bombs drop from investment grades to below investment grade. And we would expect to see some of these liquidations come in December as these companies clean up their balance sheets for year end.

Subsequent to the close of the quarter, Chimera completed a capital raise. The new capital makes the Company stronger and able to take advantage of these opportunities as they unfold over this quarter and future quarters. We will carefully deploy this capital over time in credit-sensitive assets because we believe these market dislocations will be prolonged.

We believe that the implementation of the US Treasury's TARP program coupled with the increased liquidity provided by the Federal Reserve should steady the markets and volatility should decrease over time. Having capital today to take advantage of the dislocation in the mortgage market will prove to be of long-term benefit to our shareholders as the market repairs itself in the future. And now with that, I'll turn it over to Alex.

Chimera reported core earnings for the quarter ended September 30th of $6.3 million or $0.16 per share available to common shareholders. Core earnings as a close approximation for taxable earnings out of which we pay our dividends. We declared a dividend for the period of $0.16 per share, producing an annualized dividend yield of 10.3% based on the September 30th closing price of $6.21. Our book value at September 30th was $6.18.

As opposed to core earnings, we reported a GAAP loss for the quarter of $107.6 million or $2.76 per share comprised primarily of interest income of $7.9 million and realized losses on sales of RMBS and swap terminations approximating $124 million. At September 30th, Chimera was levered at 4.6 to 1.

Our portfolio of $1.4 billion in non-agency RMBS and secured residential mortgage loans was comprised entirely of high credit quality mortgage-backed securities and residential mortgage loans. In aggregate, our portfolio was weighted to hold approximately 56% mortgage-backed securities and 44% secured residential loans.

Our annualized yield on the portfolio was 5.35% and the cost of funds, including the effective interest rate swaps, was 4.64%, providing an annualized interest rate spread of 71 basis points. As of quarter end, substantially all of the RMBS in the portfolio are AAA rated. There are no delinquent residential mortgage loans. All loans are accruing income and we have not recorded any charge-offs.

As Matt stated earlier in call, subsequent to quarter end the Company announced the sale of 126.5 million shares of common stock at $2.25 per share. Immediately following this sale, Annaly Capital purchased an additional 11.6 million shares of common stock in a private offering at the same price per share as the secondary. Estimated net proceeds from the offering are $300 million. At this time, I will turn the call back over to the moderator and we will answer questions regarding this release.

Thank you. The question and answer session will be at this time.

(Operator Instructions)

And the first question comes from the line of Steve Delaney from JMP Securities. Please proceed.

Good morning.

Hi, Steve.

Good. So I guess it's about a week now since you guys have had the cash from the follow-on in hand. So the obvious question is what have you been doing in the last week? Seriously. I was just curious if you could give us a little feel for how long it will take you to get that money -- that $300 million -- deployed into the initial agency MBS liquidity storehouse? And then if you could, take us beyond that first phase and maybe talk a little bit about the timeframe -- the ramp -- to get it deployed out into your targeted asset classes.

Hi, Steve. This is Matt.

Good morning. Hi, Matt.

Was that the totality of your question? I didn't cut you off, did I?

Oh, no. Not at all.

As I kind of laid out in the opening remarks, I think we're in kind of an interesting market right now. I think that we're seeing the fourth quarter's going to set up itself to be very volatile and I think we're starting to see some fairly large liquidations and we are looking at quite a bit of -- several packages of -- whole loans right now.

We have purchased agency mortgage-backed securities. That's a relatively easy thing to do. We have done that, but I think right now it makes an awful lot of sense for us to be very prudent and watch to see what happens in this market. I think the next month it's going to be very telling in terms of the liquidations and some of the volatility in the market. I think this year end especially is going to have a tremendous amount of opportunity for us.

If I'm reading -- hearing you -- kind of between the lines there, Matt, are you saying that you don't want to be in such a rush given that we have year end and things are volatile that there may be some benefit in taking your time and letting prices settle. Gosh, I looked at the ABX this morning. I looked a the 06-2 AAA and it looks like it's down five or ten points since mid-October when you guys were on the road.

Yes. And we expect that. I think that's exactly right. I think we are watching the market. There is no real -- and in our opinion -- no real reason to rush into the market and spend. We want to take our time. Every situation presents itself, each price presents itself, and I think going into December with cash is just a great position to be in.

Okay. And my last question would be, I think Michael has spoken about conversations that FIDAC has had with the Treasury people about TARP. And it's not clear to me what's going on on the asset purchase side. I guess if you have anything you could share with us about what insight you guys have to that process and whether you think it will change under a new administration? And I guess the final piece of that is, do you guys see TARP as a friend or a foe of the Chimera strategy?

You know what? Steve, hi. This is Wellington.

Hey, Welly.

How are you?

Good.

Obviously with the new President coming in and him basically trying to assemble his new administration, I think you'll get a little more clarity. The way the situation stands right now, I think that Treasury itself doesn't have clarity on how it's going to address the actual purchase of assets yet. So they did -- as everybody knows -- they did opt to basically just inject the capital into the banking system initially and then try to sort things out.

But I think it's really going to be the weight of the new administration to figure out how they're going to deploy it. Again, we continue to try and place ourselves in the thick of it and monitor the situation, but I think that nobody has a clear view on how it's going to be. But obviously, we want to ride in a friendly parallel position to whatever the government decides to do on an asset purchase selection.

Okay. Thanks a lot.

And the next question comes from the line of Jim Ackor from Sterne Agee. Please proceed.

Thank you. Good morning, everyone. I was wondering -- Matt, I think you made a comment about looking at pools of whole loans. In this environment, how would you propose you actually go about financing that? Is that going to be equity financing or are there pools of potential debt financing out there that you can put your hands on to finance this type of asset class?

Jim, this is Matt. The whole loans right now, especially some of the pools that we're seeing, you can buy them with cash and get double-digit returns, cash-on-cash. That's with equity purchase. So without any financing.

Okay. And that's what I figured, so it's double-digit returns, cash-on-cash. With regard to -- maybe a follow-up on Steve's question --

Yes.

In some of your releases and regulatory filings and some of the commentary on earnings calls, you've laid out a pretty broad spectrum of assets that you would consider investing in.

Yes.

When you try to narrow it down a little bit, the reality is -- I was not privy to anything that was said on the roadshow when you guys were raising capital, but what are the classes that you're focusing on most intently?

Primarily, although we have the ability, and things like you said in the indenture, a fairly broad mandate to invest along the mortgage front, we are and continue to like high grade residential mortgage credit, whether it's in securities, which are AAA or highly-rated securities, or in first lien, high FICO score borrowers in the loan market.

Yes.

And that's where we want to deploy the capital. We have no plans at the moment to veer off of that into, say, commercial mortgages or those types of assets. We want to stay firmly in the residential first lien space.

Okay. And then the last question I had was -- I don't know if somebody can comment with regard to what the quarter-end spread looked like. I didn't read in the press release. I just wanted to make sure the numbers -- is there any specific phenomenon associated with -- ?

Yes. There was a LIBOR -- the LIBOR spiked up at the end of the -- I'm sorry, Alex --

Right. And you probably saw in our S-11, our funding is at L plus 150. Between the 29th and the 30th, LIBOR doubled. So on the last day of the month, there was a significant spike in our borrowing rate. The following day, obviously, LIBOR dropped significantly and our borrowing rate dropped back down.

Okay, so --

That number is a snapshot on 9/30, so it's a one-day spike.

Okay, so one could presume then that with LIBOR having fallen off a cliff here over the last couple of weeks that --

It's been a good thing.

It's been a very --

-- the borrowing costs are coming back down. Okay.

Absolutely.

Excellent. Thanks a lot.

Thank you.

(Operator Instructions)

And the next question comes from the line of Bose George from KBW. Please proceed.

Good morning. Just had a couple of follow-ups. One is just on the agency MBS you guys have purchased. How much capital has been deployed into that?

How much capital has been deployed into that?

Do you feel the --?

Well, one of the things right now is that I think we're looking at it. We have cash to invest and we're not borrowing against it at the moment.

Yes, Bose. We're going to try and stick with roughly 30% of the capital once all of the money has been deployed, is dedicated to supporting the agency position. But until that, we use the vagaries of day-to-day management because if you have the cash, why borrow against -- ?

Okay.

Why borrow against the position?

Okay. Makes sense. And then just on the LIBOR question. Is it one month LIBOR plus 150 or three month or what's the --?

Overnight LIBOR.

Overnight LIBOR.

Okay, great. Thanks.

Sure.

And the next question comes from the line of Jim Young from West Family Investments. Please proceed.

Yes. Two questions. Just wanted to clarify on the agency securities. When you're raising capital, you mentioned that you're going to deploy that into the agency securities and lever it 3 to 1. Have you deployed the entire $300 million and levered that at 3 to 1?

Since we do have cash and that cash is not dedicated to other investments right now, [it's raised] for the agency position. So the agency position is funded with equity that was raised. As we move through time and deploy the capital into the credit space, we'll lever the agency position up, but we do not intend to go greater than 3 to 1.

Okay. And then secondly, can you provide us with a pro forma book value for the capital raise? You had mentioned book value at September 30th. Was it $6.18?

Right. Immediately following our capital raise, the book value is approximately $3.05.

Okay. Thank you.

You're welcome.

And the next question comes from the line of Ben Atkinson from Gagnon Securities. Please proceed.

Yes. Thanks for taking my call. One quick question. So does your funding then change nightly with the change in overnight LIBOR? You update those costs every day?

That's correct.

Okay. And second, you mentioned that you think markets could come in more during December. And I wonder if you could just help us understand from the opposite perspective that there is a risk to waiting. How are you thinking about the market? How much better returns do you think you can get by waiting and how are you making sure you don't wait too long?

I think that's a fair question. I think the idea here is that we want to access the markets over a large period of time. We didn't want to and we don't want to rush in and deploy all the capital at once and we told people when we were out on the road that we wanted to take advantage of this over time.

I think as we look at going into year end I would handicap it, that it's going to be a volatile year end and I think there's more of a chance of asset prices to go down. I think we've been correct so far. And going forward, the idea is that we want to spread this out over this quarter and next quarter -- our deployment of the capital into the credit space.

Okay. So sort of your longer-term plan is to have everything invested certainly by the end of the first quarter?

Yes.

If not sooner.

We are certainly bidding on things. You don't want to buy the first thing you see and you don't want to be the winner on the first list you bid on.

Okay. Just trying to get a little bit more --

You can't really size up how easily things come.

Thank you.

(Operator Instructions)

And the next question comes from the line of [Amaru Almen] from [36 Capital Group]. Please proceed.

Good morning. I was just wondering, what sort of leverage are you looking to use on the non-agency part of the portfolio going forward?

We're going to add the non-agency assets, whether they're whole loans or they're securities, and we're going to buy those with cash. So we're not going to use leverage to purchase those assets.

Okay. And then, are you planning to maintain the -- assuming --?

Yes. We're planning to maintain the repo exposure we currently have in the portfolio and we're going to add new assets to the portfolio.

Okay. So overall, the portfolio will still be leveraged, just less so than what we saw at quarter end?

That's correct.

Okay. Thank you.

And you have a follow-up question coming from the line of Bose George from KBW. Please proceed.

Great. Thanks. This is a follow-up just on that last question. On the line that you guys had with Annaly right now, is that just going to run off as that portfolio pays down or is that going to be available for other stuff?

Most likely, it's going to -- as the bonds amortize, we'll pay down that line.

All right. Thanks.

Sure.

There's no further -- the next question comes from the line of [Jeffrey French] from UBS. Please proceed.

Good morning. Could you give us some color on your repo capacity with lenders other than Annaly?

We still have 12 repo lines in place with counter-parties on [the street]. It's not that we've terminated any of those repo agreements other than the warehouse agreements, which we discussed in the second quarter. So all of the lines are still in place.

Are any of those committed?

No.

No.

It's not. On a standard mortgage-backed security repo agreement, those lines are typically not committed.

And what's your total capacity under those 12 lines?

That's a discussion that you have with the credit department at each counter-party. And typically, you're not given a line amount. You discuss it as you come up against thresholds for them, then you discuss it with the credit department.

Okay, thank you.

You're welcome.

And you have a follow-up question coming from the line of Jim Ackor from Sterne Agee. Please proceed.

Hi. With regard to the quarterly average yield on the asset portfolio, at 5.35% it strikes me as a little bit low when you look at some of the agency portfolios for things like Analy and some of the other agency mortgage REITS. Given the nature of the assets, I wouldn't have thought that number would come down as significantly as it has. Can somebody just provide a little bit of color on that, please?

The yield on the assets are generally -- in the quarter, we did sell assets. We sold some of the, I guess, higher-yielding bonds in the portfolio. And the assets in general that we have are very short and average life and they're adjustable rate mortgages and generally trade on the front end of the curve and have a lower yield. I think -- what's, Chris, the average?

Two and a quarter years.

About two and a quarter years.

And most of this stuff was purchased the beginning of this year when short rates were fairly low, so --

Okay. Do you see where I'm going with this, though? If you've got assets that are non-agency and are [whole] loans that are securitized and you're getting this kind of yield and you can get a better yield or a comparable yield from an agency-issued MBS, it almost kind of calls into question what's the point?

Yes. That's the yield on the loans and the bonds that we purchased earlier. The yield on the assets we'll be purchasing with new capital will be much higher.

Significantly higher.

You can buy AAA, really fine bonds between, say, 12% and 18% yields right now.

In the [teens] for cash, right?

Cash.

In some instances, it's in the 20s.

I'm sorry. 12% to 18% and in some instances in the 20s?

Yes. And then that's where the new capital will be [deployed].

Wow. A sign of the times, I guess. Okay, cool. Thanks a lot.

Yes. And I just want to make sure that you understand that the portfolio -- the numbers here -- the 5.35% -- reflects the old portfolio, not the new capital being deployed into the market.

And there's no further questions at this time. I would now like to turn the call back over to Mr. Lambiase. Please proceed.

Thank you for listening to us today and we will be back with you for the fourth quarter earnings call in the beginning of next year. Thank you.

This concludes the presentation for today, ladies and gentlemen. You may disconnect. Have a wonderful and safe weekend.