Chimera Investment Corp (CIM) 2009 Q4 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the fourth-quarter earnings call for Chimera Investment Corp. At this time I would like to inform you that this conference is being recorded and that all participants are in listen-only mode. (Operator Instructions).

This earnings call may contain certain forward-looking statements within the meaning of the 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 reference to future period or periods or by use of forward-looking terminology such as made, 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 a variety of factors including but not limited to, our business and investment strategy; our projects, financial and operating results; our ability to maintain existing financing arrangements, obtain future financing arrangements and the terms of such arrangements; general felicity of security markets in which we invest; the implementation, timing, and impact of and changes to various government programs, including the US Department of Treasury plan to buy agency RMBS; the terms asset-backed, securities loans, facility and the public-private investment program; our expected investments; changes in the value of our investment; interest rates mismatched between our mortgage-backed securities and our borrowings used in such fund purchases; changes in investment rates and mortgage prepayment rates; effects of interest rates, caps on our adjustable rate mortgage-backed securities; rates of default or a decrease 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; impacts of changes in governmental regulations, tax law and rates, accounting guiding and similar matters; availability of interest opportunities to real estate related and other securities; availability of qualified personnel; estimates relating to our ability to making distributions to our stockholders in the future or understanding our competition and market trends in our industry; interest rates, the debit securities markets and the general economy.

For a discussion of 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 on any forward-looking statements to reflect 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 Corp. Please go ahead, sir.

Thank you, Gina. Hello and welcome to the Chimera Investment Corporation fourth-quarter 2009 earnings call. This is Matthew Lambiase, President and CEO, and I'm joined today by Alex Denahan, our CFO; Chris Woschenko, our Head of Investments; Bill Dyer, the Head of Underwriting, and on this call this morning, Wellington Denahan-Norris, the Chief Investment Officer of FIDAC, and Jay Diamond, our Managing Director at FIDAC and a member of the Board of Directors of Chimera. And we are all here today to review the fourth quarter of 2009 and answer any questions that you may have.

I want to begin by discussing the fourth-quarter developments and developments subsequent to quarter's end, all of which I believe to be very positive for our Company. In particular, I want to focus my comments for this call on re-securitizations, which are an increasingly sizable portion of our portfolio activities. It should be clear from our financials that we are building a portfolio that will deliver strong, long-term performance for our shareholders. It is evolving into a securities focused portfolio that takes advantage of re-securitization technology in order to generate strong taxable income out of which we pay our dividend. Very simply, our re-securitization is a process by which the cash flows on the mortgage-backed bonds or bonds are restructured in order to create new senior and subordinate tranches. We sell off different pieces of the new structure, typically the AAA tranche and keep other pieces, typically the subordinate or the mezzanine pieces. Re-securitizations help deliver benefits to the Company. By virtue of structural leverage, it delivers when we sell off the senior tranches, giving us the ability to recycle the proceeds of security sales back into the market. There is a significant accretion that arises from acquired securities at deep discount prices and restructuring them. As Alex will explain in a moment, these accretions will account for relatively larger difference between taxable earnings and core earnings, and we will endeavor to keep the market appraised of this dynamic in the quarters ahead.

Chimera was the largest non-bank issuer of re-securitizations in 2009. We completed $3.2 billion of re-securitizations in the second half of 2009, including a $1.7 billion deal we closed on the last day of the third quarter. Now this is an important fact. When we price deals, we sell AAA assets and reinvest the proceeds back into the market. As always, our trading debts remain opportunistic, and we have reduced our purchases of bonds when we believe bonds are too expensive on a relative value basis, as was the case in the first month of the fourth quarter.

The market did soften in November, and our trading desk was able to reinvest the proceeds and actually use some borrowings to increase the size of our portfolio late in the quarter. The timing delay from investing the proceeds had a short-term effect of lowering the annualized yield on the portfolio. However, we believe that our prudent investment decisions should add long-term value to our portfolio going forward.

I'm also happy to report that Chimera priced the largest re-securitization of 2010, another $1.7 billion re-securitization at the end of January. This deal increases the size of our high yielding re-securitization mezzanine position, and because of the availability of repo funding with AAA bonds, we now have the flexibility to hold and finance some bonds in the deal that we would have sold in previous deals. We remain cautious with repo financing, and we will only seek to increase leverage moderately as the market and liquidity recovers.

There is currently an abundance of liquidity for highly rated bonds in all the fixed income markets. It seems that banks, insurance companies and money managers all have significant amounts of cash available to buy AAA rated assets, and we are seeing deals on these assets grind lower over the last two quarters. This increase in liquidity and desire for AAA rated bonds helps Chimera price and sell its re-securitized senior bonds at increasingly lower yields. And even as the market prices have increased in the non-agency mortgage-backed securities market, we are still finding attractive and accretive opportunities to re-securitize bonds. And we are going to continue to execute on our plan to buy and re-securitize nonagency mortgage-backed securities.

Not only are re-securitizations positive for the Company for the reasons that I enumerated, including the increase in taxable income, but it also potentially gives Chimera substantial upside should the housing market recover. Since we currently price draconian loss assumptions into our portfolio, any positives that change from our assumptions would benefit our mezzanine positions. And although these securitizations are complicated, we believe that they will deliver long-term value to your shareholders, which will be more evident in the quarters to come.

Now I will turn the call over to Alex, who will review the financial results for the quarter.

Chimera reported core earnings for the quarter ended December 31 of $80.7 million or $0.12 per share. We calculate core earnings for our investors because is it intended to be an approximation for re-taxable earnings out of which we pay our dividend. However, we expect taxable earnings per share to run higher than core earnings in the foreseeable future. This is due to the accretion of discounts on assets we have re-securitized during the year. Thus, Chimera estimated taxable earnings for the quarter was $0.16 per share. Our re-securitized assets were rerecorded as sales for GAAP, and as such, we remove the assets we sold from our book at the time of sale and recognized a gain or loss on the sale. We accrete discounts for GAAP only on the securities we retained in the portfolio, which contains significant portions of subordinate pieces that do not receive principal payments until the senior pieces have paid off. Those pieces not receiving principal repayment, although receiving coupon income are not accreting discounts in a meaningful way.

For tax our re-securitized assets are treated as financings. Essentially we are treated as owning the entire piece we transfer to the trust at the time of the securitization at our carrying value at the time of the transfer. We do not recognize a taxable gain or loss on the sale of the seniors we sell for each transaction. We accrete the discount on the underlyings that we transfer to the trust as it pays down on the entire underlying as credit losses on the underlyings reduce our taxable income at the time that they occur. We expect the difference between the tax recognition of the discount and the GAAP recognition of the discount to cause our taxable income to be higher than our GAAP income until the time the subordinate pieces begin to receive principal paydowns. This difference is evidenced in the annualized yield on the average earning assets, declining from 7.71% to 6.37% quarter to quarter.

As I stated earlier, when we sell senior securities and retain subordinate securities out of the securitization transactions, in many cases the subordinate pieces are locked out of principal payments for a certain period of time. On a GAAP basis, this lowers the yield on that portion of the portfolio, but again, that accretion is picked up in taxable earnings.

I just want to mention as a caveat this entire discussion of tax versus GAAP reflects current accounting treatment and would be subject to change if GAAP standards are revised.

We declared a dividend for the period of $0.17 per share, using the annualized dividend yield of 17.53% based on the December 31 closing price of $3.88. Our book value at December 31 was 317. As compared to core earnings, we reported GAAP income for the quarter of $95.5 million or $0.14 per share. And at December 31, Chimera was levered 1 to 1. At December 31 our portfolio of $4.6 billion was weighted to be approximately 68% nonagency RMBS, 25% agency RMBS and 7% secured residential mortgage loans of high credit quality. The $2.4 billion nonagency portfolio is comprised of approximately 63% seniors and 37% subordinate pieces.

During the quarter, Chimera sold assets primarily from its re-securitized assets with a carrying value of $213 million for realized gains of $16.2 million. As Matt discussed, subsequent to quarter-end we re-securitized $1.7 billion in principal value into $691 million of AAA rated bonds, $1 billion of subordinated bonds with an ownership certificate, and $1.7 billion in I/O. At closing of the deal, we sold $128 million of the AAA rated bonds.

At this time we will turn the call back over to the operator and answer any questions you may have.

(Operator Instructions). Charlotte Chamberlain, Chamberlain Asset Management.

Two questions. First of all, I can see numerically why your book value went down, but I was wondering if you could just walk us through why the book value went down?

And with respect to the transaction, the re-REMIC transaction that you did in January, is that expected to impact your book value?

The second question has to do with non-performers. I see that you put aside $1.7 million in loan loss reserves, which I assumed is for the actual loans you have on your balance sheet, and I was wondering there if you could give us some color on how the performance of the loans that you have on your balance sheets are performing. And if you have any insight as to -- or if you could just tell us whether the Freddie/Fannie buying back of the nonperformers and their securitizations would have any impact on you? Thanks very much.

Okay. Great, Charlotte. Tell you what -- this is Matt Lambiase. I will go over the book value, and then I will turn it over to Alex to talk about the nonperforming question in our reserves.

With regard to our book value, I think it's just an important thing to state that book values are a snapshot of a moment in time, and that was at the end of the year. Our portfolio is certainly more complicated than it was in the past, and we now have $1.5 billion at the end of the quarter in mezzanine re-securitization positions, which are not actively traded. And we all know now that the market in January was much stronger. And I think the more important thing is that the mezzanine re-REMIC positions actually traded in January, and I think that will give people I think a position to data points to price the positions going forward.

Right now we know the market is stronger, but again it's not only a snapshot at the end of the period, and we don't know where that is going to be at the end of the first quarter. And I think our marketing process is consistent and I think very conservative, and we follow the same procedures consistently whether you like the results or not sometimes. So I will turn that over to Alex to answer the other part.

With regard to the loan loss provisions, we based all of our loans in securitized assets were originated by PHH. And so we base our loan loss provision of the experience of PHH and the shelf and the assets they have securitized.

Quarter-over-quarter their 60-day plus delinquency bucket is up nearly doubled, and so my provision is taken off to reflect that.

Now the performance of the assets that we have actually securitized are performing very well. I did record my first charge-off for the quarter for a very small dollar amount of $170,000. There are 700 plus odd loans in this portfolio, and there are currently 14 of them that are either 60 days plus delinquent. So they are performing very well, and my provision is adequate based on my exposure on those 14 loans.

Andrew Wessel, JPMorgan.

Just two of them. One of them is, since you are out earning or out overpaying GAAP income, is there a borrow or a paid out of capital component to pay the dividend on a quarterly basis?

It is not paying out of capital. What will happen is we will use a portion of our principal repayments to pay the dividend over time. Rather than being able to reinvest, you would use your principal. Which in essence there is a delay between when I declare and I actually pay my dividend. But over time we will have to use a portion of our principal to pay that dividend.

So from a balance sheet perspective, that is just coming out of cash?

Yes, absolutely.

And then -- sorry, did not mean to cut you off. Just the other question was, with the market having rallied substantially and gotten even toppie there in the fourth quarter and in your targeted an asset class, what are the thoughts on going forward? You obviously did a very big securitization there in the first quarter. As you're reaching full leverage or fully invested levels, as you get paid out, what are your targeted assets going forward?

You know, we are seeing still good opportunities to buy assets and re-securitize them that are accretive and still good value to us in the marketplace. And you are right. This market is definitely starting to evidence itself in some normal flows.

October I think is a great example. We noticed that all the bonds coming out of the market were going into dealer hands, and there were a couple of new dealers, some Japanese dealers, came into the market that were all buying securities. We did not see a lot of the portfolio turning over. And that was a tail to our trading desk that the market had a high probability of getting a lot weaker, and we held off buying securities until we started seeing some more softness in the marketplace in November and December.

The market is going to give us these types of opportunities going forward. And there's always going to be, I think, somewhere for us to invest accretively and attractively for our shareholders.

Steve DeLaney.

JMP Securities. Alex, thanks for the disclosure of the $0.16 taxable. That certainly helps and answers some questions for us. I would like to start with the non-agency repo that Matt alluded to. Could you give us some sense -- you have like $1.7 billion of unaffiliated repo. Could you give us some sense of how much of that is backed by the non-agency collateral?

I have roughly $430 million that is non-agency. The rest is agency.

Non-agency. Okay, very good. And I get you loud and clear here on when we are talking about the mezz or the subordinate re-REMIC securities and why we're going to have to figure out from a modeling standpoint that we are going to have higher taxable rather than GAAP or core earnings there. Is there any way to kind of generally describe or quantify for us -- we know -- we also now know how much of this portfolio is subs. I think you said 37% right? That looks like that's about $890 million of your fair value, the 2.8 in non-agency.

No, the 67 -- when I gave you the allocation between the seniors and subs, that is the percentage of just the non-agency pool.

Right, and that is $2.4 billion, right?

Right.

Yes, so that is right. So I took 37% of the $2.4 billion, so I get about 890. I apologize if I misspoke. So about 890. So it's a meaningful peace. Is there someway that you guys could look at that and say, okay, just our taxable yield on those bonds, say, for the fourth quarter or just generically, our taxable yield is ex percent but near term here because we are not accreting discount due to lack of principle repayments. Our GAAP yield is only X or only Y. Is that possible? Could you help us frame that?

You know, I will definitely think about that. I think your best guess is to use what you expect the coupons to be by a weighted average price to get a good yield on those.

Right. So if we have a 5.5% coupon and you got a cost basis in the subs of 25% or 30%, you could get at it that way?

Yes.

And for tax, just to clarify, your taxable accretion is not assuming any losses, you are accreting the whole thing and then you take the losses as they come, right?

That is correct.

Okay. Thanks, folks. I will drop back in the queue.

Ken Bruce, Bank of America/Merrill Lynch.

You mentioned in your comments that you are seeing the ability to actually finance AAAs. I'm interested in what comments you could provide in terms of how much more capital recycling can occur within the balance sheet? It looks like the last security had a much bigger subordinate piece relative to prior securitizations. So I'm trying to figure out essentially how much further your current capital base is going to be able to get you in today's markets. And I have some follow-ups, also.

Well, I think the availability of financing is certainly out there for us now. We are seeing many more banks and brokerage firms come to us with I think attractive terms. Really our repo desk has been very careful to put bonds out with companies that we think are committed and into the marketplace, and we are getting terms out, longer dated terms, six months. I think that is going to be in the market. I think the liquidity for the assets, people feel very comfortable lending against AAA re-REMIC AAA bonds currently in the marketplace. And we have I think a tremendous amount of flexibility right now with our balance sheet where we can borrow and then reinvest the proceeds out of themselves.

What is the haircuts on the financing for the AAA?

You know, we have been seeing things between the 20% to 25% haircut. And anything from -- we have had a couple of people offer us money LIBOR plus, say, anywhere between 100 to 130 basis points. And those are terms, longer terms, out six months or even some people have been talking about doing longer than six months as well. So there is an awful lot of money out there. It is really just picking the people we want to do business with in this space.

So would your preference be that as you begin to in essence maximize the capital allocation across the portfolio to potentially add some financing across some of the AAAs that you have retained and in essence get more buying power that way, or would there be -- (multiple speakers)

Yeah. No, I think that is exactly right. I mean we are continuously optimizing the portfolio to try to drive the capital as hard as possible. So if we see a great fit for the AAA re-REMIC, we will take it. If we see great financing terms for long term, we will take that. And that is just one of the things that the portfolio management does here to add value to the shareholders.

Okay. And within the context of the larger subordinate piece for this latest securitization, is that a function of this just be underlying collateral that is dictating that, or are you seeing some shift in terms of just the structure for re-securitization?

No, that is just based on where the rating agency shook out. As we progressed, they just got a little more conservative.

Okay. And then lastly, could you describe what the spread move has been, the difference between the spread move has been say on the AAA component, as well as the non-agency underlying collateral, just so we can understand some of the economics?

Yes, sure. I mean I think that is important. When we first did, if you remember on our first deal that Chimera executed in the first quarter of 2009, we did a small re-REMIC. We sold the AAA bonds I think north of 10% yield. It was a fine trade because we were buying the assets very wide at the time. Currently we are seeing a tremendous amount of demand for these AAA bonds, and we are starting to sell them 5% around that level give or take or maybe even just it could be even lower if the bonds are shorter. So you are seeing a tremendous compression in the AAA spreads.

The underlying collateral, the ones AAA bonds that we are buying and restructuring have come in as well. They were probably in the mid-teens when we first raised capital, and now they are bonded paper between 10% and 11% loss adjusted yield. And again, we are still finding very attractive opportunities to restructure and re-securitize and hold on to those mezzanine pieces when they gain I think just a tremendous amount of upside for the Company.

Bose George, KBW.

I just wanted to go back to the taxable income issue. I was just wondering, should the GAAP yield increase pretty materially once the subs are no longer locked out, and that way over the life of the securitization you will end up with your GAAP equaling tax?

Yes, that is exactly what we expect to happen. Down the road when the subs are receiving principal payments, I would expect my GAAP to be higher than my tax.

Okay. Great. And then just going back to the book value issue, is it fair to say that the mezz underperformed the seniors and driving that slightly --?

Yes. You know what, there are bonds that don't -- we know a lot of bonds mezzanine positions that don't -- are not actively traded. And so you can get a lot of different opinions if people don't see price points in the marketplace. That is what happens at year end. We all know today that prices are a lot more robust, a lot higher, and the good thing is that we have also seen some of these mezzanine re-securitizations trade in the market in January, which will give everybody a good idea of where they should be marked going forward.

So I think it is a snapshot in time. It is December 31, and we are going to have another snapshot at the end of the first quarter.

Great. And I just want to add I think you should keep in mind that roughly half of the move in book value comes from my dividends being greater than my earnings for the quarter. So $0.05 of that move comes strictly from the fact that my dividend was higher than my actual earnings for the quarter, the GAAP earnings at that point. So I think just keep that in mind as well.

Okay. Great. And then just one last thing on the size or the amount of re-REMICs you have on your balance sheet, did you say it was $1.5 billion, and does that include the deal that was -- or the securitization that was just done?

In the original phase?

Yes, just the breakout between the re-REMIC, the subs and the seniors on the balance sheet.

At the end of the year, that is the original phase, right.

Operator Instructions). Douglas Harter, Credit Suisse.

I was just -- not to dwell too much on the taxable difference, but if you could just talk about how you think about -- which is a better method for sort of the underlying true economics of the bonds that you own? Is it closer to the taxable? Is it closer to the GAAP? Is it a different number? How do you guys think about the economics of it?

It is really a combination of the two. The taxable income is what the shareholder receives, and so from my perspective as a shareholder, I would focus on the taxable number. But the actual performance of the bond is going to be similar between where GAAP is and where tax is. GAAP allows you to provision to a certain extent for the expected losses on your securities where tax does not until the actual loss occurs. And so somewhere in between those two numbers is going to be the actual expected economic performance of the bonds.

Great. And when you gave the number about the percentage, the 63% of seniors non-agency, if you could give the breakdown or if you have it the new AAAs in there versus the original AAA sort of new AAA re-REMIC securities?

It is almost -- it is largely new AAA remaining in the portfolio. Because we have re-securitized most of what was in the portfolio.

That is as of the end of January?

At the end -- yes.

[Jim Young], [West Family Investments].

You had mentioned on this recent re-securitization in January that you had priced some draconian assumptions into this transaction. Could you share with us what those assumptions are? I'm just trying to get a sense as to what kind of residual risk you have on the balance sheet.

I will let Chris answer that.

You know, what, that is hard to generalize. There are 40 or 50 bonds in the deal. They are all different. So the draconian assumption is based on that particular deal, not just the general assumption.

I mean, Jim, I would say that every assumption we are making right now we don't value bonds saying that there is any recovery in the housing market. So when Chris and the team looked at a bond and determined the price on it, not one of the scenarios show a recovering housing prices in that in a way we looked at it. So if you actually have that happen, the value of the bond and the yield on the bond would be much greater than the way we are looking at it currently. And that is what I meant when I said draconian.

Okay. Then, as a follow-up, if you sold $128 million of the AAAs as part of this transaction, where were they sold, and where are your current marks for the amount of the AAAs that you have retained?

We typically don't disclose where we sold those, and due to the fact that I'm not sure whether this will be on-balance sheet are off-balance sheet at this moment in time, I am still considering that for January for the first quarter. I did not disclose the gain or loss on the transaction because it may be a financing, it may be a sale. We sold the seniors. As Matt said, it was very --

Yes, we sold things with a low 5 yield handle on them, which we think is pretty attractive.

(Operator Instructions). Steve DeLaney, JMP Securities.

Just a quick one. Can you guys estimate or what are you modeling internally as far as how many years the new AAAs will take to be fully paid off before you see cash coming to the mezzanine bonds?

You know, that is difficult to say, too, right, because some of them are structured 30/70 and some of them or 80/20. So it is going to take a whole lot longer for the 80 piece to pay off than the 30 piece. But in general it is probably three years.

For years? Okay. Very helpful. Thank you.

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

Well, thank you all for participating in the fourth-quarter 2009 Chimera earnings call, and we look forward to speaking with you again in the next 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 the ID number passcode of 35866531.

This concludes our conference for today. Thank you for your participation, and have a nice day. All parties may disconnect.