Chimera Investment Corp (CIM) 2010 Q1 法說會逐字稿

Good morning. And welcome, 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 all participants are in listen-only mode. At the request of the Company, we will open the conference for questions and answers after the presentation.

This earning call may contain certain forward-looking statements within the meaning of the 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 future period or periods or by the use of forward-looking terminology such as may, will, believe, expect, anticipate, continue, or similar terms or a variation 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 strategies, our projects, posted financial and operated 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 implementations, timing, and impact of and changes to various government programs including the US Department of Treasury's plan to buy agency RMBF, and 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 mortgage-backed securities and the borrowings used to fund such purchases, changes in interest rates and mortgage prepayment rates, effects of interest rates caps on our adjustable rate mortgage-backed securities, rates of default or decreased recovery rates of our investments, prepayments on the mortgage and other loans underlying our mortgage-backed or other asset-backed securities, the degree to which our hedging securities may or may not protect us from interest rate volatility, impact and changes in governmental regulations, tax laws and rates, accounting guidance and similar matters, availability of investment opportunities in real-estate related or other securities, availability of qualified personnel, estimates relating to our ability to make distributions of our stockholders in the future, our understanding of our competition and market trends in our industry, interest rates, and debt security markets of the general economy.

For a discussion of the rates 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 and 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 will now turn the conference over to Mr. Matthew Lambiase, Chief Executive Officer of Chimera Investment, Incorporated. Please go ahead, sir.

Thank you, Michelle. Good morning, and welcome to Chimera Investment Corporation's First Quarter 2010 Earnings Call. This is Matt Lambiase, President and CEO of the Company. And joining me on the call this morning, Alex Denahan, our CFO; Chris Woschenko, our Head of Investments; Bill Dyer, our Head of Underwriting; [Chadri Yolotiga], our Head of Structuring; and also on the call Wellington Denahan-Norris, the Chief Investment Officer of our Manger, FIDAC, and J Diamond, a Managing Director at FIDAC and a member of the Board of Directors of Chimera.

I'll make a few brief comments on the residential credit market and our portfolio. And then Alex will go over the financial statements. As always, we're here to answer any questions that you may have. And we're also available after the call for follow-up questions on the accounting changes.

In the first quarter, we saw continued increases in liquidity in the non-agency residential mortgage securities market. Prices increased across the board. And, more importantly, there was more trading activity in the mezzanine resecuritizations, giving dealers market clarity on pricing at quarter end. As a result, our book value increased from $3.17 to $3.42 in the period.

As noted on our last earnings call, we are still witnessing significant demand for AAA-rated assets from banks, insurance companies, and money managers. This demand has allowed us to term finance our bond position through securitizations at increasingly lower rates. For example, when we executed our first resecuritization in March of 2009, we sold the AAA class with over a 10% yield. And today, we are able to sell similar bonds with around a 4% yield. The lower financing rates allow us to continue to purchase assets, even at higher prices, and produce accretive loss-adjusted returns. The Company executed a $1.7 billion resecuritization during the first quarter.

We continue to find attractive investments to add to our portfolio. And with that in mind, we completed a secondary equity offering, which priced after the close of the last day of the quarter. We added roughly $350 million in new capital to the Company, which we targeted for investment in non-agency residential mortgage-backed securities. That new capital has now been fully deployed. And we are working toward optimizing the new portfolio with another resecuritization. These securitizations allow the Company to term finance its portfolio without recourse and without margin calls for the life of the assets. They reduce financing volatility, increase our distributable income, and make our dividend stream more durable.

With the most recent capital raise and its deployment, Chimera has a very large and unique portfolio of mortgage credit. It would be very difficult, if not impossible, to recreate the portfolio of our size and our cost basis in today's market. The portfolio is priced to produce a high income stream. But it is also set to participate in any upside in the housing market that may occur in the future. A rebounding housing market would most likely translate into higher recoveries for our portfolio and, in turn, create higher income for our shareholders.

While in the short run, we remain still pessimistic on the housing market and continue to anticipate falling prices and scenarios of our expected return calculations, in the long-run we are far more constructive on home prices. Our economy will at some point expand and create jobs again. And that will help housing recover and help Chimera's portfolio benefit. We look forward to a time when the market appreciates Chimera not only for the high-divided income, but also values us for our embedded option on the upside of housing and the American economy. And, with that, I'll turn it over to Alex.

Chimera reported core earnings for the quarter ended March 31 of $127.9 million or $0.19 per share. We calculate core earnings for our investors because it is intended to be an approximation for our retaxable earnings out of which we pay our dividends. We declared a dividend for the period of $0.17 per share, producing an annualized dividend yield of 17.48% based on the March 31 closing price of $3.89. Our book value on March 31 was $3.42.

As compared to core earnings, we reported GAAP income for the quarter of $125.6 million or $0.19 per share for an annualized return on average equity of 22.7%. At March 31, Chimera was levered 1.6 to 1. And our resources to equity was 0.7 to 1. At March 31, our portfolio was weighted to be approximately 77% non-agency RMBS, 15% agency RMBS, and 8% secured residential mortgage loans of high credit quality.

The results for the quarter reflect the adoption of accounting standards codification Topic 810 and 860, which required the Company to consolidate certain resecuritization transactions completed during 2009. The effect of the consolidation was to include $1.6 billion in AAA non-agency seniors in our portfolio that we have sold to third parties, and to include $1.6 billion of secured debt associated in our liabilities.

In addition, an adjustment to derecognized prior reported gains on sales of those non-agency seniors sold to third parties was recorded. In all, the consolidation of these non-retained assets required a cumulative increase in our retained loss of approximately $89 million.

In the future, resecuritization transactions similar to those completed in 2009 and the resecuritization completed in the first quarter of 2010 will be recorded as financings for GAAP. As such, there will be no recorded gain or loss on sales of these resecuritized assets. Rather, gains or losses will be accreted or amortized through interest income over the life of the assets.

The assets, liabilities, income, and expense associated with assets sold to third parties are identified as non-retained in the Company's consolidated financial statements. The Company has no rights to the assets identified as such on its balance sheet, nor do certificate holders have recourse to Chimera for the non-retained debt recorded in our liabilities.

In addition, Chimera has no continuing involvement with these resecuritizations except as a bond holder for the certificates we retained. At this time, we will turn the call back over to the Operator and answer any questions you may have.

Thank you. The question and answer session will begin at this time. (Operator Instructions). Sir, our first question comes from Bose George of KBW.

Hi. Good morning. That was a great quarter. I had a couple of questions. The first is just on -- I wanted to walk through the change in the book value. Since you had to reverse that $89 million, did your book value effectively start at $3.04 and then move up to $3.42 at the end of the quarter?

Yes. It does.

Okay. Great. I just wanted to confirm that. And the second thing is just on the repo side. I just wanted to see whether there was non-agency repo, other than the Annaly repo? Was there other non-agency repo in there, as well, now?

Yes, there is. The non-agency repo is roughly a third of our repo balance.

Okay. And that's generally -- is the AAA seniors that are being repoed?

Yes.

Okay. Great. Thanks very much.

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

Thanks. I was wondering if you could help us understand if the GAAP as it's construed now, does that more closely approximate taxable income than it did in the fourth quarter?

It does. For taxable income, the Company has what's called a debt for tax opinion on these transactions. So, for tax it's essentially as if we never sold the assets. We just financed them. And now the way that the transactions are recorded for GAAP, it's essentially as a financing, as well. The difference is in the accretion of the discounts on these transactions. For GAAP, we are permitted to have a loss adjustment, where for tax there is no loss adjustment until the actual loss has come through the security.

Great. And then also, Alex, do you have the numbers for the different classes of the MBS as of January 1 for after the adjustment was made just to get a sense of the growth during the quarter?

I don't have them.

Is that something that will be in the Q?

Yes.

Okay. Thank you.

Your next question comes from the line of Henry Coffey from Sterne Agee. Please proceed.

Good morning, everyone. And let me add my congratulations; great quarter. When we look at the upside relative to consensus, my guess is a lot of it was on the interest income side. And some of that, obviously, is just better performance of the portfolio. But some of it -- now I understand you're allowed to accrete some of the amortization of the discount against your sub bonds. Can you give us a sense of what the various inputs were that changed the number relative to where you were in the fourth quarter?

Sure. For GAAP, it's now treated like tax where all of the underlying bonds that we sold are considered as if they're still on our books.

Right.

I'm accreting on the underlying rather than on the senior versus the sub because essentially everything is back on the books. So, if I've sold a senior -- if we've sold a senior in December or in the fourth quarter, we were no longer accreting discount on that senior. Now, the senior is in my portfolio. So, we are accreting the discount on it.

What was the dollar impact of that change?

We don't quantify the dollar impact of that change. If you look at the income statement, you can see the difference between the interest income and the interest expense on the non-retained. You should expect that to be largely accretion, which is running about $17 million, I believe.

So, that spread is mainly accretion?

Yes.

And then I was -- to the extent that you're able with so much going on in the agency market, is there anything we should be thinking about with those assets? It's obviously a pretty small piece of the pie.

Yes. I think, while it's an important part of our position, it really is not -- the premium that we have on the book there is not material for the income of the Company.

Thank you very much. Great quarter.

Thank you.

Your next question comes from the line of Ken Bruce of Bank of America Merrill Lynch. Please proceed.

Good morning.

Hi, Ken.

Could you characterize the changes in pricing for the senior bonds that you're acquiring versus the re-REMIC securities that you're selling? I'm just trying to get a sense as to how the dynamic between the inputs and outputs are changing.

The senior bonds in the new markets, we're probably buying stuff in the 60's all the way up into the 80's, depending on how the bond looks. And the difference is when we restructure and we sell to super seniors we're getting the super seniors off with a four handle as opposed to a six or seven handle like we were before.

Matthew Lambiase; I think the takeaway, Ken, is that the mezzanine re-REMIC bonds that we retained do have a high teens, low 20's IRR on them when we make them still with the cheaper funding costs. So, it's still a very accretive trade for us to put out.

Would you -- I guess I'm just trying to understand the rate of change, if any. Is it as accretive as they were in the third and fourth quarters of last year? Or is there any changes in terms of the economics for the Q1 transaction relative to those that you had done earlier last year?

I say where we're creating subs is about the same as it's been for the last six months.

Yes. And I would also add that it's a lot easier for us to do these transactions than they were earlier last year. There's much more demand for the AAA bonds. And we can aggregate positions, and we can sell off those AAA bonds at very attractive levels.

Right. And are there any changes from the -- that you can really discuss from the rating agencies' perspective in terms of what the subordinate pole position needs to be in order to get a deal done? I'm just trying to understand what's happened --

I think, generally speaking, and Chris, maybe you want to talk about it, but generally the subordination levels are a lot larger than they were last year. And I think the economics of the transaction work that even though the subordination levels are larger, we're selling the senior bond at a much cheaper or much richer level with lower yield. And we're able to strip off an [IO], too, which adds to the economics of the transaction for us, as well.

Okay. Great. Thank you very much. Good quarter.

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

Good morning, everybody.

Hi, Steve.

I apologize if any of this was -- I was a little late hopping on. So, if you guys covered any of this, my apologies in advance. First thing, could you share with us the ticker on your latest re-REMIC, the $1.7 billion?

It was CSMC 2010-1R.

1R. Okay. Thanks a lot for that. And my real question was this. Just obviously a very solid report. And I was trying to get a handle around -- I know that, obviously, with all the accounting changes and certainly understand the change in your accretion method now versus before. But just looking at the absolute, given that the real economics of -- other than that discount accretion bit, the real economics haven't changed that much with the reconsolidation and the assets. Other than the $1.6 billion that came back on, there wasn't a big change in the size of the portfolio from, say, December to March.

So, I'm struggling a little bit with the 50% increase in net interest income, I guess picking up where Henry Coffey was going. And just to understand, when we look at that and it resulted in a 10% asset yield and a 23% ROE, Alex, I guess this is to you, is there any -- as those numbers ran through this first quarter because of the reconsolidation, is there any revenue reflected in that growth and net interest income that was what I would call catch-up or adjusted for prior period, and not really reflective of, say, just the first quarter revenue attributable to just holding the positions in the first quarter?

There's no adjustment for prior-period income because when we reconsolidate, you take everything into the prior year. And then you roll it forward as if you had held the assets from day one on your balance sheet.

Right.

The difference that I think that you're referring to is the seniors and the subs that we are holding, the retained portion, is now accreting discounts even if the subs are not paying because --

Yes. Understood.

Because we are referring to the underlying. So, it's not just the difference in what is listed as non-retained assets. We're also picking up accretion in the retained assets, as well.

No. Exactly, and that was because even though they're not receiving cash because of the preference, the cash flow allocation, you're now allowed to accrete that.

Yes.

So we get -- we understand that. So, I guess what I'm hearing you say then, the 10% yield and the run rate of net interest income, that is basically a run rate and that's what we should expect for the second quarter, as well, plus whatever you do with portfolio growth because of the new capital.

Yes.

Okay. All right. I guess that's it. Did you guys comment on the timing of when you got your money about a month ago? Did you comment on when you thought you'd have that fully deployed?

It's fully deployed now, Steve.

I'm not surprised. Okay. Okay. Thanks, guys. Appreciate it.

Thank you.

(Operator Instructions). Your next question comes from the line of Jim Young of West Family Investments. Please proceed.

Hi. For the $350 million of capital you deployed, could you share with us some of the characteristics of the bonds? And on a net, what was the loss-adjusted yield returns that you were able to generate from those investments?

You know, we were able to buy assets in the context of where we've been buying them along. It's been a very nice thing for us to have capital in this market right now. There are a lot of different large banks and institutions looking to sell assets. And I think we were just lucky to have the money to take advantage of some of the deleveraging that's going on in the international banks. We bought all day and banged up [pine] [paper] within, I'd say, anywhere between 9% to 11% type of loss-adjusted deals. And we anticipate putting them into another resecuritization. And we hope to be able to create retained positions that yield in the high teens, low 20's. And that's in line with what we've been doing in the past.

Okay. Great. And, secondly, for the retained positions that you have, how have the underlying bonds performed with respect to the credit characteristics, given the retained portfolio that you have on your balance sheet?

We have a lot of bonds (inaudible) better than we expected or better than we modeled.

Okay. Thank you.

Thank you.

(Operator Instructions). Your next question comes from the line of Richard McKinney of D.E. Shaw. Please proceed.

Hi. Good morning. And great and very skillful quarter in terms of how you guys positioned the portfolio. I had one question on -- we completely echo your sentiments on the positions that you've been able to put on in mezzanine are extremely difficult to source within the fixed income space. And obviously those positions have done quite well. And your stock seems like a great way to gain exposure to that sector. Could you give any additional color on the quarter-over-quarter changes in value you've seen on existing positions within that mezzanine subordinated re-REMIC bond?

Yes. I mean, it's just like everything else. It tightened in, so it's generally better. But the structure of the bonds are very unique to themselves. So, it's hard to characterize them all in one blanket statement.

I would just say that we did see trading, more trading, in those assets during January and February. And I think dealers were generally surprised at how much demand there was in the marketplace for the mezzanine resecuritizations. And I think that helped us with mark-to-market at the end of the quarter. People had a lot more clarity on those positions. And they had all appreciated pretty nicely. They are levered positions. And the prices improved significantly.

Okay. Great. Thanks.

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

Well, thank you all for participating on our first quarter 2010 earnings call. And we look forward to speaking with you next quarter. 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 of 65247723. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.