Chimera Investment Corp (CIM) 2008 Q4 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, 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 the 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 payments rate, effects of interest rate caps on adjustable rate mortgage backed securities, rates of default or decreased recovery rates on our investments, prepayment of 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 of investment opportunities in real-estate related and other securities and market trends in our industry, interest rates, the debt securities market 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, see risk factors in our most recent annual report on Form 10-K, and all subsequent quarterly reports on Form 10-Q. We do not undertake and specifically disclaim any obligation to publicly release the results of any revisions which may be made to any forward-looking statements to reflect their occurrence of unanticipated or events or circumstances after the date of such statements.

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

Thank you, Letrice. Good morning and welcome to the fourth quarter earnings call for Chimera Investment Corporation. I'm Matt Lambiase, the CEO and President of Chimera. Joining me on the call today are members of our senior management team. Our CFO, Alex Denahan, our Chief of Investments, Chris Woschenko, our Head of Underwriting Bill Dyer, and also joining me today are Wellington Denahan-Norris, the Chief Investment Officer for FIDAC and Jay Diamond, Managing Director of FIDAC and a director of Chimera. We are here today to review the results of the fourth quarter of 2008 and answer any questions you may have. Before we take your questions, I will make a few general comments and have Alex review the quarter.

For far too many, 2008 will not have passed fast enough. It was a year of tremendous asset volatility topped off with massive governmental capital injections into the banking system. Chimera took its lumps through the period but emerged on solid footing. Despite the difficult environment, or perhaps more accurately because of it, the company successfully raised new equity in late October. Management disclosed and executed on a defensive strategy to invest in new capital into agency MBS on an unlevered basis and slowly ramp non-agency asset purchases. We thought the market would have another wave of volatility and we waited to see more clarity on a number of fronts. It turned out to be a wise decision. In November, Treasury announced that they were not going to use the newly created TARP program to buy mortgage assets as previously anticipated by the market, and in December, several large banks came under pressure, both of which contributed to increased price volatility in the it last half of the quarter. To make matters more interesting, subsequent to year end, new bankruptcy mortgage cram-down legislation is being contemplated in Washington, has once again added uncertainty to the market. Chimera, like other participants, is waiting to see the complete language of the legislation.

Nonetheless, there are aspects of the market that may benefit from legislative changes. The U.S. Government is expending extraordinary effort to add liquidity to the housing market. Such efforts, such as the FDIC bond guarantee program, have started to thaw out parts of the non-agency MBS markets. Banks who issued these guaranteed bonds are using the proceeds to fund their consumer lending, and in doing so, freeing up cash flow that can now be directed towards the secondary markets. So far this year we have seen a much more pronounced bid from banks in the prime MBS market and prices have increased accordingly.

The rising market prices for prime jumbo secondary MBS that we have seen so far this year may be the first stage of a recovery that will make credit available once again to jumbo borrowers and help stabilize home prices. We have remained both cautious and optimistic as we look forward. Markets generally tend to overreact on the downside in these circumstances. Our capital resources and our talented team are busily evaluating opportunities, but we have been selective in our commitment to the market in the current environment. The bottom line is, we are confident that our patient deployment of capital will benefit the portfolio in future quarters and for years to come.

And with that, I will turn it over to Alex.

Chimera reported core earnings for the quarter ended December 31st of $9 million, or $0.07 per share. Core earnings at the close approximation for taxable earnings. out of which we pay our dividend. We declared a dividend for the period of $0.04 per share, producing an annualized dividend yield of 4.64% based on the December 31st closing price of $3.45. Our book value at December 31st was $2.34. As opposed to core earnings, we reported GAAP income for the quarter of $8.8 million, or $0.07 a share. At December 31st. Chimera was levered 2.1 to 1.

At December 31st our portfolio of $1.4 billion included non agency RMBS, agency RMBS, and secured residential mortgage loans of high credit quality. During the quarter. we purchased $254 million of new investments from the proceeds of our secondary offering completed in late October. By market value, our RMBS portfolio is composed of 70% of our legacy nonagency RMBS investment, 28% newly purchased agency RMBS, with the balance in newly purchased deeply discounted nonagency RMBS. In aggregate, our portfolio was weighted to hold approximately 56% mortgage-backed securities is and 34% secured residential mortgage loans. We sold no assets during the quarter.

Our annualized yield on the portfolio for the quarter was 5.74 and the annualized cost of fund was 3.96 providing annualized interest rate spread of 1.78. As of quarter end substantially all of the RMBS in the portfolio are AAA rated. All loans are accruing income, and we have not recorded any charge-offs. During the quarter, we recorded an increase in our loan loss provision of $940,000 that is reflective of an increase in delinquencies and losses as the originator. As we have said before, we have adopted this reserve policy due to the lack of loss history at Chimera.

At this time I will turn the call back over to the moderator and we will answer any questions regarding this release.

(Operator Instructions). And our first question comes from the line of Steve Delaney with JMP Securities. Please proceed, sir.

Good morning, everyone. How are you?

All right, Steve.

The negative mark against the portfolio through OCI in the quarter of about $128 million, would it be reasonable that the majority of that, I would assume, is on the re-REMICs, is that correct?

All of it.

Thanks, Alex. I calculate that you have got those marked now at 70 versus 85 at September 30th.

That's very close.

Okay. And I guess my question there, just on that mark, I mean, should we look at that as sort of a dealer sort of a bid size indication of value? Or is that something you are coming up with internally, or is it pretty much a market bid indication?

Our policy is to mark the portfolio internally, and then to go out and get three dealer quotes and average those dealer quotes, compare that against our mark and make sure we're within a very low variance. As long as we're within that low variance then our mark stands. Essentially the Street is confirming the market value that we have placed on them.

Okay. So it looks like prime super senior AAA were down about 20 points in the fourth quarter, so I mean, even though these are super duper re-REMICs you really tracked more -- didn't seem like you got a lot of credit from the Street in terms of the higher credit support.

That's true.

Okay. And then, if any guess, if you were to have to go out and buy those bonds today, I mean, sort of the difference between the bid and the offered side of the market, I mean, is it -- are we talking magnitudes of as much as, say, 10 points, if you were to go to replace that portfolio today?

Obviously, the bid offer is five points.

Five points? That's very helpful.

Steve, I would just like to add, the fourth quarter was an amazingly volatile period, and, not just us, but you can go back and take a look at what John Payne was saying when Merrill Lynch and Bank of America --

Sure.

The mortgage markets were -- after the Treasury came out and said that they weren't going to use the TARP funding to buy the assets, there was a free-fall in pricing, coupled with at year end, and there was just a very dramatic period.

I think that date was like November 12th maybe, and then it was just like falling off a cliff, you are right.

We did see the market recover in early January, and I think the tone of the market currently for nonagency assets is I think very strong. There's a lot of people, a lot more interest in people buying the assets. We're seeing bid lists come, and just a tremendous more interest in the market in general, and prices have increased, I think, pretty robustly since the first week of January, and I think that the cram-down legislation that we saw has kind of stalled that rally, but I will tell you that there's a lot more interest and the market is much more robust than it was in the fourth quarter.

That's great color, Matt. I suspect that after Geitner talks at 11:00 a.m.m there may even be further interest if he says what people are speculating about the TALF program.

Yes.

Thank you so much.

Thank you.

And our next question comes from the line of Andrew Wessel with JPMorgan. Please proceed, sir.

Thanks for taking my question. I just had, I guess, trying to clarify the structure of the portfolio, so 28% of total assets is, you said, agency RMBS and the rest is legacy, or loan/non-agency RMBS, is that right?

28% of the RMBS, not of total assets, of just the RMBS.

Okay. So when we're thinking about, alternate portfolio structuring, I know that's a moving bar, but what are your thoughts today on run rate, where you would like to be in terms of weighting towards agency RMBS versus non in the securities portfolio?

In our fully ramped portfolio?

Right.

I think we're saying we're going to keep the same amount of agencies that you are seeing on the balance sheet, I would say within -- if I was going to use a rough number, I would say keep the same amount of agencies in there, or just add non-agencies to that and we're going to offset and keep our whole pool test constant.

Right. You have $27 million in cash to put in the non-agency RMBS.

We could also lever the agency portfolio.

Got you. What kind of leverage would you feel comfortable with on the agency portfolio?

It would be extremely low, and those markets, the agency collateral that we have in that portfolio is plain vanilla pass through, PBA eligible, as liquid as you get, and you are talking about very low haircuts and very low financing rates on that, but we would choose to be very low levered on that portfolio.

So like two to four? Is that fair?

Yes, I would say that those are fair assumptions for this market.

Great. And then in terms of competition, obviously another company out there in the market raising capital, just publicly saying this is -- it's getting close to the right time to buy non-agency assets and they like the price and characteristics of distressed sellers they're seeing. What kind of competition are you seeing in the asset pool? Obviously that's just one kind of small player, but who else is out there bidding?

You know, it's kind of interesting, the turn of the year. We have seen many more banks in the marketplace buying prime, jumbo paper, and that market has been extremely robust from the small banks and people getting TARP funding and other types of capital injections. We're also seeing some opportunity funds, some of the brand-name guys that have been out there that have been writing calls on the market. I think Paulson has been in the paper saying -- Paulson & Company has been in the paper saying they've been buying non-agency assets now, and it's a very large market. There are a lot of people raising money to take advantage of these opportunities, and I agree with Redwood that the opportunities are spectacular and in the public space, there are very few companies that can take advantage of any kind of Treasury liquidity facilities that they put in place going forward.

Great. Thanks a lot.

Thank you.

And our next question comes from the line of Ken Gross with Bank of America/Merrill Lynch. Please proceed.

Good morning. I would like to tackle, maybe an extension of Steve's earlier question. Can you give us some additional characteristics about your securities portfolio that basically differentiates them from where some of the peers were marking that at $0.65 on the dollar?

Well, I mean, typically -- I think a fair way to look at it, if you look at a security, then take a look at what the underlying credit support is generally you can value the additional credit support as somewhere from 50 to 75% of value. So let's say you have an extra 10% of credit support. That's going to add five to seven points of value to your bonds. That difference is going to depend on what the delinquency pipeline looks like. So if you're looking at our stuff and saying we have an extra 20% of credit support, that is going to trade 10 and 15 points higher.

Thank you. And this is more of a comment, but as you are kind of thinking about the disclosure for current -- or for future periods, would you consider enhancing the disclosure around the non-agency portfolio in particular but maybe just generally speaking the RMBS portfolio, so we have a better sense as to what type of investments are being held within that portfolio, please?

We'll consider it.

Thank you. That's it. Thanks.

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

Yes, hi. You mentioned there were no nonperforming loans at 12/31. Could you give us clarification as to how many of the loans were 60 days delinquent, how many are 30 days delinquent in the overall portfolio?

Sure. As of 12/31 I have one loan that's 30 days and one loan that's 62 days. Out of a purchase of roughly 1,000 loans I have two that are or were delinquent at 12/31.

Thank you.

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

Good morning. Couple things. First, on the agency MBS, is the purpose of holding that agency MBS just to meet the hold pool test or is it also an opportunistic source of capital if you see things you want in the non-agency side?

I think it serves both of those for purposes. It turned out to be a very good investment, and also it does it meet our hold pool test.

Okay. Then just switching to the jumbo AAA prices, you mentioned that prices have recovered. Can you give us some indication relative to where they were in October, where prices are now?

It varies sector by sector. If you are talking about just sort of prime whole loans, that's dramatically higher. I would say that could be 10 or 15 points higher.

Higher than what it was in October?

Yes, because a lot of the thrifts that receive capital injections need to buy nonperforming jumbo paper, and there really isn't a whole lot of production, so that market is really sort of -- that market has rallied quite a bit. If you take a look at the super senior securities market, that's actually quite a bit lower. But that sort of ebbs and flows. As the market tightens, more bonds come out, then the market weakens. That moves around day to day or week to week and it can move by like five or 10 points. In general you could say that market is probably still 10 to 15 points cheaper than where it was in November.

Okay. And finally, just on -- had a question on the tax treatment of the purchase discounts. Since the accretion of the discounts is taxable income but not cash earnings, is there a limit to the amount of discount securities one can have in a weak portfolio?

There's not a limit. The limit is in managing your cash flows to pay your dividend. At some point in time if you have a significant portion of your portfolio that's discounted, you are going to be using your principal payment, your P& payment, a portion of your principal is going to be used to pay your cash dividend. So it limits future earnings to a certain extent, and it's a cash flow decision you make in the current quarter.

But I was just thinking, in terms of -- right now you are nowhere near a point where you have to worry about that, is that fair?

No, no, not at all.

Great, thanks a lot.

And our next question comes from the line of Douglas Harter with Credit Suisse. Please proceed.

Thank you. Wondering if you could talk about sort of the pros and cons of sort of continuing to wait versus taking advantage of opportunities that you do find attractive or waiting and possibly missing some of the rally as continual fed programs come out.

Well, I think that's, that's certainly part of the thing that we -- that's our job is to figure out the best time to access the markets and be prudent. I would caution that this market is -- has a lot of government intervention and as we saw from the TARP announcement, that was a good thing, and it turned out to be a very bad thing when they decided not to use it, and the market reacted kind of violently with that news. I think we feel pretty constructive in the space. We've seen a lot more players in the market. We have committed capital to the market so far this year. The first week of January and the last week or so of December we started buying paper. We did pull back a little bit from the market when we saw this cram-down legislation because we really do want to get to see what the final language of that legislation is before we fully commit to the market. And I think that's just being prudent. I think when you have so many different moving parts around here, it's the smart thing to do with the capital, is to be prudent and have dry powder. And I think, you are right, it's certainly -- we're constantly looking at the market, constantly trying to evaluate the right time to execute, and I think we called it right in the fourth quarter, and I think -- and I'm pretty constructive that we are going to call it right in this quarter now.

With regard to the cram-down legislation, it looks like, from a credit point of our portfolio, our portfolio is, I think, pretty well insulated from any direct losses from the legislation, but you do have to worry about market movements with regard to the legislation, and I think the way the bill and legislation looks right now is that we're not going to -- that the market is not going to sell off dramatically when the final legislation gets through the Congress.

Thank you.

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

My question was answered, thank you.

(Operator Instructions). And our next question comes from the line of Jordan Hymowitz with Philadelphia Financial. Please proceed.

Hey, guys, thanks for taking my call.

Hey, Jordan.

I have two quick questions. One is, there's been a number of articles recently written that jumbo prime is starting to have much greater losses than traditional prime. Are you noticing that? And I'm not talking about alt-A. I'm talking about more jumbo on size.

Yes, the thing about that is, when you see people describe jumbo prime, that's a very broad type of definition, and it's not always -- jumbo prime isn't always what you think. A lot of cases, that's going to include the option ARM paper which obviously is performing very well. In some cases it is also going to include a lot of the although-a paper, but as you can see from our standpoint with the type of loads we have that are plain vanilla, jumbo prime, high-FICO loyalty loans, it's performing just fine. We see a lot of securities every day that we look at. There's some '03, '04, '05, even some '06 and '07 stuff, and they're real plain vanilla loans, and they're just fine so I think you need to look when you see those kind of statements you need to look very closely at the types of loans that they are actually including in the sample.

You have already commented on your credit quality. Do you think that jumbo prime is not really -- let me ask you the question. Are you seeing any dispersion and delinquencies between jumbo and agency conforming for similarly underwritten product?

No.

Okay. My second question is, I know you guys don't own any residuals, so you probably couldn't comment on that but for people that own residuals, when the cram-down occurs, do the residuals get wiped out first in the cram-down?

It depends how the deal is structured. So different deals are structured different ways. In a lot of cases, I don't think the cram-downs are actually going to increase the cumulative losses for the deal. It's just going to alter the way that the losses are distributed throughout the capital structure. So you need to look at and see how the waterfall of the actual capital structure is written.

So it really would depend situation by situation.

Yes, sir.

Thank you very much.

And our next question comes from the line of Joe Stieven with Stieven Capital. Please proceed.

Good morning. I joined just a few minutes late so I missed a few things. But going back to the RMBS portfolio, I thought you said the agency RMBSs were approximately 28% of the total MBS portfolio. Is that correct?

That's correct.

Okay. And then when you were looking for projection purposes, for us, leverage you are talking about, keeping on the agency RMBS, somewhere between two and four times? Is that what you said?

That's correct. That would be when we're fully ramped.

When you're fully ramped, and obviously on the non agencies, you are essential not leveraging those at all right now.

We're not leveraging beyond what we were levered.

Okay. And then when you look at current opportunities right now, where do you think the most attractive opportunities that you are seeing in the current market right now and what type of new investments, what type of characteristics do you find attractive and what type of returns do you see on new investments right now?

Well, there are a lot of opportunities, I think, for the most part they're in the security market right now as opposed to the holder market. That doesn't mean that we don't think that the holder market is actually going to cheapen up a little bit. It seems likely there's going to be a lot of paper coming out from the FDIC over the course of the year so I suspect there will be some opportunities there as the year goes on but right now I think sort of what we think are the most opportunistic places to be right now are the alt-A and some of the prime type -- super senior and senior type bonds. That's probably where we're going to stay.

Okay. Thank you.

And our final question is a follow-up from Mr. Bose George with KBW. Please proceed, sir.

Thanks. Just had a couple follow-up questions. One was just on the agency RMBS you currently don't have any repo, is that correct?

12/31 there was no repo on that.

Great. And then just on the cost of funds, it was $3.39 at the end of the quarter. Assume it was elevated just from locking stuff in earlier. Is it safe to assume that goes down pretty materially in the first quarter?

Yes, that's a safe assumption. The $3.39 includes the cost of financing on the secured debt as well.

Oh, it does. Okay.

Yes, it does. So you have to take that into consideration.

Okay. Great. Thanks.

And there are no further questions. I will now turn the conference back to Mr. Lambiase. Please proceed, sir.

Well, thank you for joining us on the fourth quarter 2008 earnings call. And we look forward to talking to you the again at the end of the first quarter 2009. Thank you.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-888-286-8010, or 1-617-801-6888. The access code is 6986023. Thank you for all your participation in today's conference. Everyone have a great day.