Chimera Investment Corp (CIM) 2009 Q3 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 listen-only mode. At the request of the Company, we will open the conference up for question and answer session after the presentation.

This earnings call may contain certain forward-looking statements within the meaning of Section 27A in 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 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 of those terms, or the negative of those terms.

Actual results could differ materially from those set forth in forward-looking statements due to the variety of factors including, but not limited to, our business and investment strategy, our product 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 the changes to, various government programs including the US Department of the Treasury's plan to buy agency RMBF, and the term asset-backed securities loan facility, and the pubic-private investment programs, our expected investment, changes in the value of our investment, interest rate mismatches between our mortgage-backed securities and the 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 in decreased recovered rates of our investments, prepayments of the mortgage and other loans underlying our mortgage backed and other asset-backed securities, the degree to which our hedging strategies may or may not protect us from interest-rate volatility.

Impact in changes in governmental regulations, tax law, and rates, accounting guidance and similar matters, availability of investment opportunities in real estate related or other securities, availability of qualified personnel, estimates related to our ability to make distributions to our stockholders in the future, our understanding of our competition, and market trends in our industry interest rates in debt security markets, or 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 result of any revisions which may be made to any 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 call over to Mr. Matthew Lambiase, Chief Executive Officer of Chimera Investment Corporation. Please go ahead, sir.

Thank you, Michelle. Good morning, and welcome to the third quarter earnings call for Chimera Investment Corporation. I'm Matt Lambiase, 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 today is J. Diamond, the Managing Director at FIDAC and a Director of Chimera. We are all here today to review the results of the third quarter of 2009, and answer any questions that you may have. But before we take your questions, I'd like to make a few general comments, and then have Alex review the financials for the quarter.

The third quarter began with the Treasury's announcement that it had finally picked its public private investment partnership managers, these managers were tasked with raising equity from private investors in order to invest in eligible assets, including mortgage backed securities.

In the PPIP program, Treasury matches the capital raised and also provides some leverage to the partnerships. After the announcement, prices of residential mortgage backed securities started to increase as investors look to participate in advance of this large new pool of capital entering the market.

To-date, prices of residential mortgage backed securities continue to be very well bid, as some of these new capital begins to be deployed by a few of the PPIP managers. There are also other contributing factors to the tightening of credit spreads. The Federal Reserve successfully purchased over $900 billion of agency mortgage backed securities, with the goal of taking $1.2 trillion out of the market.

The removal of this much spread product out of the fixed income market has, in our opinion, caused all credit spreads to tighten. Investment grade in high yield corporate bonds, CMBS and ABS all tightened in the quarter, as the government induced liquidity started to seep into the broader markets.

Chimera's book value benefited from the increasing prices in the quarter, and more importantly, the increasing values made it possible for us to market our re-REMIC senior securities are increasingly profitable prices. There's a shortage of high quality Triple-A rated assets in the mortgage market and because of our capital raises in the prior three quarters and our re-REMIC securitizations, Chimera was in the enviable position of having a large number of senior bonds to sell.

The increase in liquidity is bringing new opportunities to the market, banks are becoming much more eager to lend against our non-agency assets, and we expect to see more depth and breadth to the non-agency funding market. Also, if this liquidity event persists and spreads continue to tighten, it will make primary mortgage origination and securitization feasible much earlier than we originally anticipated. And this could be a very positive development for Chimera as there are few companies with the capital and the expertise to move quickly to take advantage of the opportunity.

We believe that new mortgages underwritten in the last year are probably some of the best credit quality we've seen in a generation, to be able to buy these new mortgages and term finance them through securitization, would allow us to lock in high returns on superior credit that would benefit our shareholders well into the future.

This quarter's results clearly show how Chimera benefited from being a first mover in taking advantage of the distressed mortgage market earlier in the year. We raised capital and invested fully, and now we are reaping the benefits of those actions. We look forward to our next change to move quickly and deliberately take advantage of changes in the market, and we believe that Chimera is positioned to execute on this opportunities when they arise in the future.

And now, I'm going to turn it over to Alex to review the quarter's results.

Chimera reported core earnings for the quarter ended September 30 of $85.9 million or $0.13 per share. Core earnings is an approximation for REIT taxable earnings out of which we pay our dividends. We declared a dividend for the period of $0.12 per share, producing an annualized dividend yield of 12.57% based on the September 30 closing price of $3.82.

Our book value at September 30 was $3.27, as compared to core earnings, we reported GAAP income for the quarter of $158 million or $0.24 per share. At September 30, Chimera was levered 0.9 to 1. At the close of the quarter, our portfolio of $4.3 billion in residential mortgage assets was weighted to be approximately 53% non agency RMBS, and 28.8% agency RMBS with the remaining 8.2% in secured residential mortgage loans of high credit quality.

During the quarter, we completed two re-securitizations. In the first transaction, we re-securitized $1.5 billion in principal value into $856 million of triple-A rated bonds and $665 million of subordinated bonds and an owner trust certificate. At or subsequent to closing, we sold $775 million of the triple-A rated bonds, and realized a gain on the sales of approximately $67 million. In the second transaction, which was completed on the last day of the quarter, we re-securitized $1.7 billion in principal value into $915 million of triple-A rated bonds and $815 million of subordinated bonds and an owner trust certificate.

At or subsequent to closing, we sold $261 million of the triple-A rated bonds and realized a gain on sales of approximately $5 million. In addition to the gains I just discussed, Chimera also sold assets with a carrying value of $32 million for realized gains of $2.4 million. At quarter end, we recorded an other than temporary impairment of our assets in the amount of $2.2 million, this impairment is largely attributed to the subordinate tranches or the owner trust certificates on a whole loan securitization completed by the Company in early 2008, and an RMBS re-securitization completed during the current year.

In addition, the Company recorded a small principal write-down related to two securities held in the portfolio, one being an owner's trust certificate. The assets that required an OTTI charge as well as the assets with principal write-downs are currently cash flowing and performing as expected. Our annualized yield in the portfolio for the quarter was 7.71 and the annualized cost of fund was 1.67, providing an annualized interest rate spread of 604 basis points.

As of quarter end, 0.6% of the portfolio in the securitized loan portfolio is greater than 60 days delinquent and 1.3% of the $498 million in securitized loan portfolio is in some stage of foreclosure. We have recorded during the quarter, a small increase in our loss provision which brings our reserve to 61 basis points and have not, to-date, recorded any charge off against our reserve for loan losses.

At quarter end, Chimera had financed $1.6 billion in repurchase agreements of which $153 million is with annually and is collateralized by non-agency RMBS. The remaining $1.4 billion of repurchase agreements is with other counterparties and is collateralized by agency RMBS.

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

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

(Operator Instructions)

Your questions will be taken in the order received. Please standby for your question.

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

Thank you. Good morning, it looks like you guys have been busy over the last few months.

Absolutely.

Buying and structuring bonds. So, Matt, I guess could you -- we knew about the July transaction because I think you put that in your Q in early August but the -- so can you talk to us a little bit about how this re-REMIC market has evolved, I guess, specifically, were there any changes and sort of structure in terms of between July's transaction and September's that are worth noting?

No. I mean, the structure was pretty much the same. The only thing that's a little noteworthy is that the Fitch, who had rated our two deals, after the second deal, sort of got out of the business.

You're right.

So, we have to rely on S&P now.

Okay.

Like everything else, I mean, the super seniors have tucked in quite a bit on those, but the structure of the transaction is virtually the same.

About -- it look like about 55% of the face going to the seniors and 45% to the --

You have to realize that that depends quite a bit on what actual bonds we're actually putting in there too.

Exactly.

Just to look at it on that face, by itself, might be a little simplistic.

Well, given that the collateral, the raw collateral that -- the senior RMBS that you were purchasing in August and September for the 9/30 deal, obviously prices were higher than when you were aggregating collateral for the July 30 deal, should -- did you notice that like the required yield by investors on the A1 bonds, I mean, originally, those were up around seven if they drifted down?

It's quite a bit lower now.

Okay.

Several hundred basis points lower.

Wow, so in the six range or lower? Below six?

Yes.

Okay.

And that also depends very much on the structure of that top bond -- right?

Exactly, exactly. And --

And Steve, we're seeing some of the shorted bonds trade with the five handle --

Wow, okay. And granted, I mean I understand that we can't go from the general to the specific here and that these are kind of just specific indications but it sounds like at some point, this summer, we -- there was this concern that the re-REMIC trade that was great, you got one down, but it wasn't clear that it was going to remain a viable transaction but it sounds like the -- the fact that -- and I think you touched on that with the fed sucking in all the spread paper that money has got to go somewhere and these A1 bonds, I mean, look like a lay-up if you're an absolute return guy.

Yes, actually I think, it's exactly right and we know we are -- I think in the re-REMIC space, we're probably the largest non-bank issuer or re-REMICs, certainly last quarter. And that's exactly right, there was a true shortage of Triple-A assets, high quality paper and we really clocked these cycles right in the fact that we had a lot of paper to sell at the right time and those spreads continue to come in.

Okay. And I guess, quick may I ask -- in terms of you gave a sort of the details of the transaction, but making some assumptions about fair value, it looks like that you had somewhere around 720 million of remaining highly liquid A1 bonds on the books at September 30, is that in the ballpark?

Yes, it is.

Okay. Thanks, guys. I appreciate the color.

Thanks, Steve.

Your next question comes from the line of Douglas Harter of Credit Suisse, please proceed.

Thanks. I was wondering if you could help us -- obviously, given the sort of the amount of turnover you guys had in your balance sheet with the two transactions, sort of where spreads stood at quarter end, and sort of get a sense of the profitability of the new subordinate tranches you created.

Sure. At quarter end, because of the nature of the securitizations, it changes the structure and the cash flows of portfolio a little bit and they're a big chunk of our portfolio, so the yield on the non-agency portfolio at quarter end is 11 -- a little in 11% range on the non-agency portfolio. And that's -- it's obviously a blended rate on the entire portfolio.

Does that include the 700 million or so of the triple-As that could be sold and reinvested into a higher rate?

Yes.

Great, that's very helpful. Thank you.

Thank you, Doug.

Your next question comes from the line of George Bose of KBW. Please go ahead.

Good morning, this is Bose George.

We know who you were. How are you, Bose?

How are you? Could I have a question just on the -- the realized losses from sales that you had going into the quarter from the older sales, I was wondering what the dollar amount of that was and once that's offset by the gains you guys have, is that going to change in any way you do the re-REMICs, can you structure them to as financings, to avoid generating gains?

The re-securitizations are structured as debt for tax, and so that does avoid the capital gains being distributed.

Okay, so the old loss has nothing to do with this, you can -- these gains don't have to be distributed at all?

That's a very simplistic explanation because --it's a very simplistic explanation, but basically, yes, the gains do not have to be distributed.

Okay. And just a question on the way you're -- the gains for the securities are calculated, after the securitization, do you have to allocate the bases to the senior and the sub? Is there some formulaic way of doing that or is -- it just depends on each -- it's security specific?

At the time you're securitizing the assets, you fair value each new tranche, and you allocate your cost basis in what you transferred into the trust based on the relative fair value of the new tranches. So on the day that we securitize the assets, in the case of the last securitization, it was a Credit Suisse deal. Credit Suisse has indicative levels on each piece --

Okay.

And I allocate my cost basis of what I transferred into the trust based on that relative value.

Okay, great. Thanks a lot.

You're welcome.

(Operator Instructions)

Your next question comes from the line of Rob Schwartzberg of Compass Point. Please proceed.

It's Rob Schwartzberg, hi Two questions, one, what do you see as the target leverage for the Company? You're slightly under one to one, is that where we should anticipate going forward? And my second question has to do with what you're seeing in terms of the availability of product and the yield on that product relative to the second quarter in the non-agency space.

Okay. Well, with regard to leverage on the portfolio in the Company, I think that we are starting to see people much more interested with the liquidity that's in the market now, we're starting to see banks much more interested in providing some kind of repo or terms structure to non-agency assets, and we are evaluating those structures.

You could potentially see in the future, an increase in liquidity that way -- increase in leverage that way. And also, I think that we could potentially see if the TALF come on line for agency or for non-agency assets, we would definitely use that, you could see an increase in our balance sheet there. I think that we're going to evaluate all the different opportunities that present itself and the increasing liquidity is bringing them out right now.

With regard to the second quarter in product availability, I'll have Chris talk to that.

As spreads come in, assets come out for sale so we haven't really seen -- there's been plenty of supply available.

But at the same kind of yields as in the --?

No, they're a little bit lower than -- their more like low teens.

Versus like mid to --

Mid teens, yes.

Mid teens. Okay. And if I can just ask one follow up then, would you consider yourself -- absent more availability of repo financing, would you consider yourself fully invested until you raise more equity?

Well, there's always the availability for us to do relative value trade, so if we can sell super seniors at five and go reinvest at 12 that's still a pretty good trade for us. Right?

Okay. All right, well, thank you.

Thank you.

Your next question comes from Bose George. Please proceed.

Okay, I just want to follow up on non-agency prices since quarter end, have they continued to be pretty strong?

Yes, they have.

Yes.

Great, thanks.

(Operator Instructions)

Your next question comes from Jeff Bronchick of RCB Investment Management. Please proceed.

Whatever. Good morning. Could you just go over again exactly what you're seeing with the banks as far as providing that conduit and larger banks, smaller banks? And specifically, are you geared up to make this happen, and are we talking this year? Is this just the first inning?

I think it's -- it is the first inning, I would say last quarter, we had people offer us money in terms of leverage on bonds that we would buy for them; those were generally dealers. I think this quarter, there has been a lot more trading, the market seems much more robust, and we're seeing other banks, other participants in the repo market come into our financed debts with reverse inquiry looking for non-agency mortgage backed securities to reverse repo.

And I think this is the first inning, and I think we stated before that we weren't too interested in getting involved unless we have a really robust market with a lot of people offering money that we felt that we get involved with that, and I think we are getting closer. If this liquidity event persists, the government stays involved in the market, we'll certainly consider those terms.

Thank you.

Your next question comes from the line of Steve DeLaney of JMP Securities. Please proceed.

Yes, sorry, just a quick follow-up. If we were to try to look to the market for some kind of a proxy to suggest value -- fair value for these subordinate A2 bonds, if we were to look at sort of like mezz triple-A on Alt-A deals, would that be sort of a benchmark, I mean are we seeing tight--?

No, the structures are different.

Yes.

Those bonds are generally pro rata and ours are sequential.

Okay, got it.

It's more -- so, no. there really isn't any --

Okay. Well, could you give us some general idea, I mean, is something in the 25 to 30 --?

It really depends on the bond I mean, but that's a good ballpark.

Okay, that's what I was looking for, Chris. Thank you very much.

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

Thanks. I just wanted to get a sense as to the amount of additional relative value trades you see within your existing portfolio, and then your appetite for raising new equity if those opportunities are still out there and how you're thinking about that.

Well, we're always looking to optimize so we still have a lot of super seniors on the balance sheet that we can turn over, and there's a potential that we could re-REMIC what we bring it again. As far as your other question --

I think - Mike (inaudible) always has a comment that he says he's always a little pregnant; that means we're always ready to take advantage of an opportunity if we see it . And aside from that, we really don't discuss our plans, and I think we are a little pregnant; we always look to the market and changes an opportunity. And like I said before, the second quarter is a good example of that. We saw a great opportunity to raise capital, to invest it, and we are certainly reaping those benefits right

Great. Thank you.

Your next question comes from the line of [Ario Shioshet of Lautenberg]. Please proceed.

Good morning. It's actually [Ed Groshens]. Thank you for taking the call. Just -- I'm glad you mentioned Mike because he was talking about expectations for the future, especially with the fed and what they've been doing in the MBSD - the agency MBS markets. I was wondering, if the fed does start to liquidate their MBS holdings over the next two years or so, does that -- do you think that attracts capital away from a non-agency paper and create more opportunities for you?

You're saying if the fed reserves sells its $1.2 trillion worth of --

Right. Sounds better that -- so I expect the spreads to wide out on that paper and then maybe capital moves away from --

That would be -- certainly it would be a spread widening event. I don't think that's going to happen, and I think we would be all very surprised if that happened. It would certainly be a buying event.

Okay. So you think there's extra capital in your space right now because things are a little bit tied around the agency side.

Yes. And I think you're just going to keep in mind that with regard to our company, we're running very low leverage so we have the opportunity to take up leverage and take advantage of the market.

Right, right. And I know there's been a couple of deals that have come public into the non-agency space. Has that affected, or do you think there's any big influence of that having on the pricing of the assets, or do you think it's modest?

No, I think it's modest and I think that the biggest part of the move that we saw was really the PPIP program being announced and coming in to some form of implementation. We're seeing a few of the managers start to deploy capital, and I think that that's what the market was anticipating and that's what caused and is causing the interest in the market and run up in prices.

Great. Thank you so much.

Thank you.

Your next question comes from the line of Michael Prouting of 10K Capital. Please proceed.

Good morning, guys. Thanks for taking the question.

Sure.

I had a couple of questions, given the buying opportunities you've seen over the last several months, would it not have been better to have -- or I'm assuming that's temporary; would it not have been better to have raised less capital and to have leveraged somewhat to take advantage of those opportunities?

No. The simple fact is that when we purchased the securities in the second quarter they were very distressed. We bought them I think -- as you see in the increase in book value in this quarter, we bought those securities before other people got into the marketplace. There was not a lot of reliable leverage available for those assets at that time and we're starting to see now leverage come back into the market.

Okay. All right. That's helpful to understand. And then the other question I had is assuming the fed does indeed start to taper off some of their liquidity programs as they say they will, what impact do you expect that to have on your space in the early part of 2010?

Well that's a good question. I think there's two aspects to it. I think that the risks currently in the market are if the PPIP managers don't raise the equity that the market expects and if the government somehow bungles it's exit from the agency market. I think those are certainly reasons why you want to keep on a relatively low leverage in defensive position like we're in at the moment.

I don't believe that the government is going to be selling its agency mortgage backed securities in the marketplace, and I think they're going to buy them, hold them, take them out of the market. And with regard to the PPIP and the other things that they're doing to add liquidity to secondary mortgage market, I think that there is a real desire for the government to get this market back, to get securitization back and I also don't believe that they are going to abandon their liquidity efforts either.

Yes, I tend to agree. Thanks.

Your next question comes from the line of Joe Stieven of Stieven Capital. Please proceed.

Actually, I thought I had un-queued myself. But, guys, good quarter. All my questions have been answered. Thank you.

Thanks, Joe.

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

Good morning, everyone. I have a quick question, do you or have you seen or did you or do you expect to see a drift lower in just the general credit quality of the assets you're purchasing, or is the execution on the front piece outpacing the strength you're seeing in underlying collateral, if that makes sense?

We run every -- when we -- whenever we buy anything, we run it through our models to see how it's going to shake out when we re-securitize it. Frankly, as we've gone along, the lower credit quality bonds worked out better for us.

Right.

So that's actually what we've focused, and I think we'll probably continue to focus there.

Okay. So no real change from --

No, absolutely.

-- what has been a status quo, I guess?

Yes.

What spawned the question just looking at your cost basis down roughly 12 points from Q2 to Q3, is that just because you've retained more of the subs?

Yes, we sold off seniors and retained subs at a lower cost basis.

Right. Is there any sort of level of percentage of subs in the portfolio that you're comfortable or uncomfortable with?

No. Like I said before, we're just looking to optimize the position.

Great. Thanks.

Your next question comes from the line of David Jackson of PENN Capital. Please proceed.

Good morning, guys. Congratulations on the quarter. Part of my question was answered, but it was -- was interested in just if you could drill in a little bit more for us on the delta on your cost basis on the portfolio. I realized that probably a big move in part of that going from a 66 points down to a 54 is probably related to the re-REMIC in the quarter. But is part of this also tied to collateral quality that was put into those trusts to get the deals done versus what you're hoping now?

No. It's just we do the securitizations and we sell the super seniors, those are trading in the 90s. The bottom piece as we said before, probably at 25 and then when we reinvest or reinvesting in the 50s and 60s.

Right.

That's sort of the math.

Okay. All right. Thank you guys.

Sure.

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

Well, thank you for joining us on the third quarter 2009 earnings call. And we look forward to speaking to you again in three months. Thank you.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 617-801-6888 or 888-286-8010 with an ID number of 56733885. This concludes our conference for today. Thank you for participating, and have a nice day. All parties may now disconnect.