Chimera Investment Corp (CIM) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, to the first-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 up the conference for questions and answers after the presentation.

This earnings call may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E 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 a reference to a future period or periods 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 business and investment strategy; our projected financial and operating results; our ability to maintain existing financing arrangements, obtain future financing arrangements and the terms of such arrangements; general volatility of the securities markets in which we invest; the implementation, timing and impact of and changes to various government programs, including the US Department of Treasury's plan to buy Agency RMBS, the term Asset Backed Securities Loan Facility and the public private investment program; our expected investments, changes in the value of our investments; interest rate mismatches between our mortgage backed securities and our borrowings used to fund such purchases; changes in interest rates and mortgages; 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 other asset backed securities; the degree to which our hedge strategies may or may not protect us from interest rate volatility; impact of and changes in governmental regulation, tax law, and rates; accounting guidance and similar matters; availability of investment opportunities in real-estate related and other securities; availability of qualified personnel; estimates relating to our ability to make distributions to our stock holders in the future; our understanding of our competition and 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 materially 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 result of any revisions which may be made to any forward-looking statements to reflect the occurrences of anticipated and 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 proceed.

Thank you, Stacey.

Good morning and welcome to the first-quarter earnings call for Chimera Investment Corporation. I'm Matt Lambiase, the CEO and President of Chimera. And joining me on the call today are members of our senior management team. Our CFO, Alex Denahan; our Head of Investments, Chris Woschenko; our Head of Underwriting, Bill Dyer; and also joining me on the call is Wellington Denahan-Norris, the Chief Investment Officer for FIDAC and Jay Diamond, a Managing Director of FIDAC and a director of Chimera.

We are here all today to review the results of the first quarter of 2009 and answer any questions that you may have. But before I take questions, I would like to make a few general comments and have Alex review the quarter.

The first quarter of 2009 was a very choppy period for the mortgage market. In the first few weeks of the New Year, we saw the market for mortgage credit firm up substantially and bond prices increase. However, this move reversed itself when Congress proposed new legislation that would allow mortgage balances to be reduced or crammed down in bankruptcy.

The unintended consequence of this legislation would potentially cause certain AAA rated non-agency mortgage-backed securities with shifting infrastructures to be downgraded to below investment grade. Roughly 30% of the market would be affected.

As a point of fact, none of the securities owned by Chimera would have been affected by this legislation.

Now, considering that the banks need to hold significantly more regulatory capital against below investment grade bonds, the market was concerned that the legislation would cause mass liquidations, and as a consequence, bond prices fell. Fortunately, late in the quarter, this ill-considered legislation was amended to avoid these consequences.

Also at the end of the first quarter, the anticipated liquidation of Thornburg Mortgage's assets weighed heavily on the market. These assets were easily absorbed by the market consequently.

At the end of March, the Treasury Department in conjunction with the Federal Reserve announced that the Federal Reserve Bank will expand the TALF program to include residential and commercial mortgage-backed securities and that the Treasury and the FDIC will initiate new public/private investment partnerships for both securities and loans.

Although the details of these programs have yet to be released, it is widely believed that when implemented, the additional liquidity in the mortgage market will have a materially positive impact on pricing.

Subsequent to quarter end, Chimera completed secondary offerings which raised proceeds of approximately $850 million. With the capital, we intend to purchase non-agency mortgage backed securities on an unlevered basis and agency mortgage backed securities using leverage.

The expected returns on the new portfolio are compelling, and they have the potential to increase materially should the government programs become fully implemented. Since the offering, we have been busy adding to our portfolio and positioning the Company to take advantage of all the opportunities that will be available in the future.

And with that, I'll turn it over to Alex.

Chimera reported core earnings for the quarter ended March 31, 2009 of $15.4 million or $0.09 per share. Core earnings is a close approximation for taxable earnings out of which we pay our dividend.

We declared a dividend for the period of $0.06 per share, producing an annualized dividend yield of 7.14% based on the March 31 closing price of $3.36. Our book value at March 31 was $2.44.

As opposed to core earnings, we reported GAAP income for the quarter of $18.9 million or $0.11 per share. At March 31, Chimera was levered 2.4 to 1, down slightly from the prior quarter. At March 31, our portfolio of $1.7 billion was weighted to be approximately 44% non-agency RMBS, 22% agency RMBS and 34% secured residential mortgage loans of high credit quality. In aggregate, our portfolio was weighted to hold approximately 72% mortgage backed securities and 28% secured residential mortgage loans.

During the quarter, we purchased $405 million of new investments with the proceeds of our secondary offering completed in late October. At quarter end, we had completed fully investing the proceeds from that offering.

Our annualized yield on the portfolio for the quarter end was 6.44% and the annualized cost of funds was 3.48%, providing an annualized interest rate spread of 296 basis points.

As of quarter end, approximately 85% of the RMBS in the portfolio are AAA rated and performing as expected. 0.1% of the balance in the securitized loan portfolio is greater than 60 days delinquent, which is 1 loan out of 802 loans in the securitized loan portfolio.

We have not recorded any charge-offs against our reserve for loan losses.

At quarter end, Chimera recorded $559.9 million in repurchase agreements, of which $453 million is with Annaly and is collateralized by non-agency RMBS. The remaining $107 million of the repurchase agreements is with other counterparties and is collateralized by agencies.

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

Thank you. (Operator Instructions).

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

Thank you. Good morning, everyone.

Alex, I apologize, I didn't get all those percentages down accurately; could you just repeat the percentage of the total portfolio that was in Agency MBS, please?

The agency is 22%.

And that is 22% of I guess a total of what, $1.65 billion if we combine all the MBS?

Yes.

Okay, great. Okay, thank you.

Secondly, do you guys have any insight from conversations you are having with the Fed or trading desks as to when we might see more details on the TALF 2 program and when it may possibly be implemented.

Steve, we have no real insight into that. We know that the fed came out with some new guidelines for commercial mortgage backed securities -- newly issued commercial mortgage backed securities earlier this week, but we have no real insight.

I would expect to get some kind of clarity out of them in the next month or two.

I guess they're supposed to announce the initial asset managers for PPIP, I think that is May 15.

That's right.

Okay. So the bottom line is you guys are just as much kind of in the dark just like the rest of us.

We are all waiting.

Okay. I know we are. Okay.

The final thing is really not a question but more of a comment. And I guess Alex, I just would ask you to consider one thing. The way the portfolio -- with you guys, with your business strategy being sort of focused on the senior non-agency paper but the need to have the compliance whole pool Agency MBS, I guess I would find the combined MBS portfolio data -- I don't find particularly useful, but if you were to break out things like yield cost basis, accretion, et cetera by the two separate buckets, the agency MBS and then the non-agency MBS, just personally, I would find that to be far more useful to the street, so I just wanted to offer that out for consideration.

Absolutely. I'll definitely take that into consideration for the Q.

Thank you, folks.

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

Thanks. I was wondering if you could give us any more detail about the $405 million that you put to work for this quarter?

Sure, a portion of it was agencies and then another portion of it was the non-agencies that we had talked about investing from the proceeds. It is split roughly half and half between those two buckets on what we purchased in the actual first quarter. And then we had also put some of the proceeds from the October offering to work in the fourth quarter.

We had one small sale related to some assets that we also had purchased during the quarter.

Then just a sort of a follow up on the question, you had said that you guys were fully -- had fully invested the proceeds from the previous offering, just wanted to get an update on your thoughts as to sort of what the leverage on the agency book -- where that can go?

Well, as we discussed in the offering we intended not to take the agency book up anymore than three to four times and I would expect when our capital is fully deployed, you should see us right in that range on the agency book.

So there is still more room to put on more debt against that agency book?

Yes, there is.

All right, thanks.

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

Thanks, good morning.

I had a couple of things. One, the CPR in your portfolio picked up to 12% from 9% and I was wondering if the improvement was from the loan side or the security side or was that the agency that was taking that up a little bit?

The loan side picked up a little bit as well as the agency side. So we got a little bit from both sides of the portfolio.

Okay, great.

And then just switching over to the capital that you guys raised, can you just give us an update on pricing and returns in the non-agency market, have there been any changes since you raised the capital and just an update on when you think the capital will be deployed?

Yes, I think we were out on the road and we told people that we like the Alt-A part of the market. We have been purchasing securities in that part of the market as well as some prime securities.

I would say that for the Alt-A senior bonds in the Alt-A market, they have not increased significantly in price in the last couple of weeks while prime mortgage backed securities, non-agency mortgage backed securities really had a substantial increase in price over the last say, three weeks.

We are, I think, internally, we are ahead of schedule in terms of deploying our capital and we have been able to execute the strategy and find bonds and get yields in the context of where we were out on the roadshow showing them.

Okay, great.

Then in terms of subordination levels on these securities, broadly speaking, how does it vary from the Alt-A to the Prime Jumbo?

Typically, the Alt-A is going to be -- '06, '07 the Alt-A stuff is going to be between 10% and 15%; the Prime Jumbo stuff is quite a bit less, it is going to be probably closer to 4% or 5% depending on who the issuer is.

The rating agencies have substantially changed their guidelines now so if we were to do a new issue at this point, they would be dramatically higher.

And I think, Bose, it is important to stress that the prices at which you buy Alt-A securities right now are right around $0.50 on the dollar, so you'll buy 100 million bonds for $50 million, there is quite a bit of subordination built into the price -- the discount price. Prices of prime securities are substantially higher.

Okay, great. Thanks for the detail.

(Operator Instructions).

Your next question comes from the line of [John Sykes] with Sterne Agee. Please proceed.

Good morning, everyone. My question goes along with one of the comments made earlier in regards to the agency versus non-agency buckets. Alex, I was wondering if you had any information handy related to the fair value of the cost and the fair value of the principal for those two buckets.

Typically, we wouldn't disclose that. What I can say is that we are purchasing -- the weighted average dollar price of the non-agency bucket is coming down as we purchase more securities at lower dollar prices.

On the Alt-A space, as Matt discussed, we are buying securities in the $50 price so you should see my weighted average dollar price trend down significantly as we invest those proceeds.

Okay, thank you.

You're welcome.

Your next question comes from the line of Andrew Wessel with JPMorgan. Please proceed.

Hi, this is Daniel Kim, I am here for Andrew Wessel. Just a couple questions. One is how do you think about G&A going forward? Now that you raised significant amount of capital, your balance sheet is going to expand, would G&A increase accordingly, or would it be very scalable and remain where it is or slightly increase?

The vast majority of our G&A is our management fee, and you should expect that to increase as the capital raises add to our equity base. Aside from that, you should see a slight trend up but the vast majority of the costs associated with the portfolio would remain materially unchanged.

Okay, and what about the amount -- obviously, you guys are going to be deploying the capital going forward but the cash portion amount that is not deployed immediately, how do you know -- how do you guys usually manage that? Do you usually put it into like money market kind of thing or do you actually just go out and immediately buy agencies until -- because the agencies are pretty liquid, right?

We would typically pay down our repo balance immediately, as that's the most efficient use of our capital and lever up the portfolio when we needed the cash again so typically, when you receive proceeds, you pay down the repo and that's what we would expect to do.

So we would expect the repo balance to decrease dramatically maybe and just temporarily maybe in the second quarter?

Temporarily until we invest the proceeds.

Okay, got it. Thank you very much.

Your next question comes from the line of Ian McBain with [Holcot Capital].

Please proceed.

Hey guys, you have mentioned that your repo line with Annaly is down to $450 million, I'm just curious what your plans are for that going forward and how low it could go?

Well, the repo line as we said in our offering, with Annaly, that line should fluctuate; you would expect it to amortize over time, and there is no schedule that we intend to pay it down by a certain amount. We intend to amortize that line down as the non-agency securities that are financed on it pay off.

Okay. And could you give me roughly what the horizon on that might be?

I think the securities that are on it probably have about a two-and-a-half year average life so it will be scaling down over that period of time.

Okay, great. Thanks.

I would now like to turn the conference back to Mr. Lambiase for closing remarks.

Thank you for listening to the first-quarter earnings call for Chimera and we look forward to speaking to you in three months to talk about our progress on ramping up the new capital and the opportunities in the market.

Thank you.

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 78627701. This concludes your conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.