Chimera Investment Corp (CIM) 2010 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the second-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 on a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

This earnings call may contain 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 reference to a future period or periods, or by 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 financial arrangements, obtain future financing arrangements and terms in such agreements; general volatility of securities markets in which we invest; the implementation, timing and impact of, and changes to, various government programs, including the U.S. Department of the 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 practices; changes in the interest rates and mortgage prepayment rates; effects on interest rate caps on our adjustable rate mortgage-backed securities; rates of defaulted or decreased recovery rates on our investments; prepayments of the mortgage and other loans underlying our mortgage-backed or other securities asset-backed securities; the degree of which our hedging strategies may or may not protect us from the interest rate volatility; impact of, and changes in, governmental regulations, tax law 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 on our stockholders in the future; our understanding of our competition; and market trends in our industries; interest rates in the debt securities markets, or the general economy.

For a discussion on the interests and the risks and uncertainties which could cause actual results to differ from those contained in 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 on 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 Corporation. Please proceed, sir.

Thank you, Adam. Good morning and welcome to the second-quarter 2009 Chimera Investment Corp. earnings call. This is Matt Lambiase. I am the President and CEO of the Company. And joining me on the call today are Alex Denahan, our CFO; Chris Woschenko, our Head of Investments; Choudhary Yarlagadda, our Head of Structuring. And also on the call this morning is Rose Lyght, the CIO of our Manager, FIDAC; and Jay Diamond, the Managing Director at FIDAC and a member of the Board of Directors at Chimera.

I will make some brief comments on the mortgage market and then have Alex go over the financial results for the quarter. As always, we are here to answer all of your questions afterward.

Over the past few weeks I've received calls from a number of investors asking if we thought we were going to see a double dip in the housing market. It's our opinion that the housing market has never recovered significantly enough to have a double dip. It has been weak, and it will continue to be weak until the excess supply of unsold homes clears the market.

There were some signs of stabilization brought on by the government's first-time buyer rebates, but it is clear to us that the housing market is currently full of distressed inventory that needs to be sold, and there is a pretty full pipeline of properties that will come on the market in the future. It is unlikely that prices will stay firm while this supply hits the market. Continued meddling with rebates, moratoriums and modifications will only delay the market finding its clearing price.

Until we see a decline in inventory or an uptick in employment, we will most likely continue to have a negative bias on home prices. However, there are some factors that also should be considered, including interest rates, housing starts, household formation, demographic shifts, and the savings rate which may mitigate the severity of this negative bias in the long run.

Mortgage interest rates are historically low, and housing affordability is increasing because of it. Sustained low interest rates should provide fundamental support to homes' price stability.

Housing starts are extremely weak. You would have to go back to the early 1980s to see new housing starts at such depressed levels. This is positive for absorption because there are fewer new homes being created to compete with sales of existing inventory.

Housing formation, or household formation, is significant for adding new homeowners. Even at the current low levels of household formation it still eclipses new housing starts, which should help to erode excess inventory of unsold homes over time.

Demographic shifts in the US population favor overbuilt areas. Nobody overbuilds houses in economically depressed areas like the Rust Belt. Generally speaking, developers overbuild in areas that people actually want to live in.

The demographic trends show that people are leaving the north and moving south for better climate and lower taxes. We do not expect that trend to change in the future, and that's good for absorption in those areas as well.

The US savings rate is increasing. Households are saving three times as much as they did -- of their disposable income as they did before the recession started in 2007. Households are doing what banks and financial companies were doing in 2008, they are delevering their balance sheets. At some point in the future as their savings build up, they may feel secure enough to reenter the property market.

I think all these factors underscore the complexity of the housing and mortgage markets. The enormous size of the nonagency MBS market, coupled with the technical complexity, have kept the prices of bonds distressed while other markets have corrected. Also, the nonagency mortgage-backed securities market has not had the direct government intervention that other asset classes have had.

The size and the distressed nature of our market allows us to deploy capital in large amounts with severe loss assumptions and attractive yield profiles. To date, the actual performance of our portfolio with regard to foreclosure rates and loss severities has been better than what we expected when we purchased the assets.

We are not surprised by the weakness of the housing market. It is a market like any other, with its own supply and demand functions. While in the short run we are negatively biased, and our loss assumptions reflect that, in the long term we think the housing market will eventually find equilibrium. It's just a matter of time.

And with that, I will turn it over to Alex to present our second-quarter results.

Chimera reported core earnings for the quarter ended June 30 of $142.8 million or $0.19 per share. As compared to core earnings, we reported GAAP income for the quarter of $124.6 million or $0.16 per share.

We declared a dividend for the period of $0.17, producing an annualized dividend yield of 18.84%.

Our book value at June 30 was 3.30, and we were levered, including nonrecourse debt, 1.6 times.

At June 30 our portfolio was weighted to be approximately 81% nonagency RMBS, 13% agency RMBS, and 6% secured residential mortgage loans of high credit quality.

The weighting of the Company's portfolio of investments continues to evolve to reflect our focus on residential credit risk, as evidenced in the mix of assets on our balance sheet.

This quarter's results include the effect of the Company completing two resecuritizations of nonagency RMBS, similar to transactions completed in prior quarters. In addition, in connection with these resecuritizations the Company financed on a permanent nonrecourse basis, an additional $628 million of its portfolio through the sale of AAA senior tranches of resecuritized assets.

During the quarter the Company put on $450 million in notional interest rate swaps that have a weighted average pay rate of 259 basis points and a receive rate of 35 basis points. As the Company has not elected to use hedge accounting, unrealized gains and losses on the swaps will run through the income statements. This quarter we recorded $11.2 million in expense related to unrealized losses on these instruments.

In addition, we completed two secondary offerings of common stock, the second which closed on June 28, raising a combined total of $768 million. Our investment team is currently putting the capital from the second secondary offering to work.

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

(Operator Instructions). Bose George with KBW.

I had a question about the $628 million, the permanent financing of the AAA bonds. I didn't really understand that. So was that kind of a resecuritization of the AAAs?

What that is, is we sold seniors from securitizations that could've been in the current quarter, or it could've been assets that we had resecuritized in prior quarters. But we sold an additional $628 million of the seniors.

Oh, from prior securitizations?

Yes.

It could be from either current-quarter or prior-quarter. And the reason we disclosed that is because they are not really -- or they are not per GAAP considered sales of assets any longer, because they are treated as consolidated financings.

Okay, great. That makes sense, thanks.

And just switching to the OTTI mark you guys had on the MBS in the quarter, I'm just wondering like what drives that -- what forces you to take a mark when that happens?

Sure. For OTTI impairment, it is very much a quantitative calculation now. And so the fact that the marks across the portfolio moved down causes us to look at the securities -- anything that is in an unrealized position has to be evaluated -- unrealized loss position has to be evaluated for impairment versus its amortized cost.

So even though the mark could be a quarterly move, we have to run cash flows on the bonds and take the expected cash flows versus this amortized cost, and then record any impairment for that difference.

So in general, the marks on the portfolio moved down. And so even though the assets are performing well, and we are not seeing the credit losses come through that you would expect if you were going to see OTTI impairments, the actual quantitative calculation drops out a little higher number.

Okay, so it really reflects the market move versus any change in --

In the change in the performance of the asset.

And if you look, even our credit losses declined over -- quarter-over-quarter. And so it's not that the portfolio is picking up in losses, it's just a function of the actual market value movement.

Okay, great. And then just one last thing. Your subordinated bond position went up. It was 30% from 25%, and I was curious if that number could go up further, if there is kind of a limit to where you want that, just given that it generates non-cash earnings?

And a related question is, when do you start seeing cash getting kicked out of the sub pieces from your earlier re-REMICs that were -- or principal payments from your earlier re-REMICs that were locked out?

Well, we will probably start getting cash losses from some of the re-REMICs at the end of this year, beginning of next year. And then we've resecuritized 150 CUSIPs. You know, the sub-bonds are anywhere from 20% to 90%, so when you have 10% AAAs, the subs are going to start to cash flow pretty quickly.

Okay, and so that will essentially start offsetting the non-cash earnings that you're seeing on this, the new re-REMICs subs?

Yes.

I guess the thing I was curious about was whether that percent -- we think that percentage could go any higher than that 30% number, or how we should just think about where that number could trend.

Well, I mean, if we continue to do the same trade it's going to get higher, right? Because, as we are buying collateral and we re-securitize and we sell off the seniors, the percentage of our subs relative to the rest of our portfolio is going to go up.

Sure. And also, you need to consider that there are senior I/Os on the portfolio. On the last three or four transactions we stripped off an I/O on the transaction, which we were receiving coupon income on all along with the seniors on the portfolio.

Yes, all the subs are cash flowing, right? They are just (multiple speakers) in prinicpal.

Yes, yes. Okay, great, thanks a lot.

Douglas Harter with Credit Suisse.

I was just wondering if you could help explain sort of the decline in the asset yield and the decline in the cost of funds during the second quarter?

It is really a function of, number one, the rates on the RMBS repo did decline slightly. But it's really a function of the asset number used at the end of the quarter. It's calculated as of the end of the quarter, and so there is a significant movement in the asset, the current face of the assets at the end of the quarter.

Does that have to do with the I/Os that you've been creating?

We have created significantly more I/Os, and so it is just really a movement in the denominator on the calculation.

And is that likely to continue going forward, that denominator?

That's a function of whether or not the resecuritization market. And we did have two deals during the quarter. At the beginning of the quarter we were ramping up assets, so there's actually what I would call a disproportionate move in that number quarter-over-quarter.

We had large inflows of cash over the quarter. We've raised 700, over $750 million of cash coming in and out and getting invested, and that distorts the number somewhat.

Our debt balance doesn't move much, but the asset, the current face of the assets does.

Okay. And then on the discount have you guys disclosed how much of sort of the unamortized discount is accretable versus how much of it is sort of a credit discount?

We have not disclosed that.

Okay, thank you.

Daniel Furtado of Jefferies.

One of my questions is, can you just talk about the rise in the cost basis for the subordinated retained portfolio? It went from 39 to, call it, 29. And I know that I/Os are baked into the March number and not the June, but what else is going on there over the last 90 days?

Well, you know, the rating agencies have sort of changed their criteria, and the sub-pieces are getting thicker. So the thicker the sub-pieces get, the higher the market is going to be, or higher our cost basis is going to be.

So is it as simple as saying you had, what, $2.6 billion at 29, and you put a $500 million slug in at like 85, and that gets me to 38?

Well, you know, if you are resecuritizing a bond, and it used to be 80/20 and now it is 70/30, we are taking out less than we sell to seniors so the cost basis on the subs is going to be -- it's going to be higher.

Right. And, for GAAP accounting when you reallocate your cost basis between your senior and your sub, you allocate it based on the relative fair value, so you end up putting more cost basis in the sub (multiple speakers) piece of the pie.

Right. So the deals you did this quarter like basically lifted the entire weighted average up to 38 from 29?

Yes.

Yes.

Okay, so -- but now these assets are trading at below 38, so I guess how do I understand that you are creating an asset that is more expensive than what you can buy it for on the market?

No, that's not the case. No, we are definitely creating it cheaper than we can buy it in the market.

Okay, then can you help me understand this 38.45 versus 37.78? (multiple speakers) fair value?

It is -- you are looking at a number that wasn't previously broken out between prior quarters, so I think your comp to the 3.31 is -- you are not including what was -- number one, asset prices on when we buy a new bond have moved up slightly.

One of the resecuritizations during the quarter was on what was largely legacy assets with a higher dollar cost, and so there is just movement in those numbers that is related to weighting the portfolio over a quarter from quarter-to-quarter.

Okay, so I guess -- so taking that into consideration, the 37.78 weighted average fair value of the portfolio is what you think you could sell the portfolio today for, assuming a liquid market?

(multiple speakers) higher subs, yes.

Right, but it costs 38.45 to get into that position in the first place, no?

Yes.

Yes, but if we owned -- if we had legacy assets that we owned at par, and when we resecuritize them we still own the subs at par.

Right, so -- but you could buy those (multiple speakers)

(multiple speakers) the number of what our cost basis was.

Right, and I guess what I'm trying to understand is that you could own those subs that you created at 85, but the market is at 37. I guess we could take this off-line.

How about -- what are the deal names of the two deals conducted in the quarter?

The first deal done -- that settled at April 30 was disclosed in the first quarter's press release, and that was CSMC 2010-11R and the second one is CSMC 2010-12R.

Perfect, thank you. Thanks a lot for your time.

(Operator Instructions). Charlotte Chamberlain, Chamberlain and Associates.

Yes, good morning. Just actually three questions. Your book value went from 342 in the March quarter to 330 in this quarter, despite the fact that you did two equity raises at substantially above book value. So I would assume -- but what I would like is some -- if you could parse out where that 3.5% went? Was it due to hedging costs or just what? But if you could parse that decline in book value between March and June?

Well, you know as the portfolio changes, as we resecuritize and sell off our super seniors, so we own more subs that are a lot less liquid. So there is just generally going to be more noise in the march of the portfolio. The bid/ask spread on those assets is much wider.

Oh, so it is much more having to do with the fact that you have more modeling from mark-to-market than actual market mark-to-market, is that what you're saying?

Yes, I'm sorry.

The marks on the portfolio, we model the marks internally and then we verify versus Street marks.

Okay, but what you're saying is that there is more wiggle -- there is a lot less clarity on the value of the assets, is that what you're saying?

It has to do with the asset mix. The subordinated portion of the portfolio is growing, and those marks are more volatile. So as that portion of the portfolio grows, you should expect to see more mark-to-market movement each quarter, I would say.

So we should be -- it is just volatile; it's not just biased to the downside?

No, and the assets are performing very well. So it is not that I would expect -- I think it is just a quarter-over-quarter mark. We mark at one point in time. So at the end of the quarter the marks were down versus where they were at the end of the first quarter.

Okay. The second thing, LIBOR jumped up dramatically with the nervousness in Europe over the quarter. And I was wondering, what is the best index to look at in terms of where your borrowing costs, your overall borrowing costs -- if you had to just pick one index, what index would you look at as an index for where your borrowing costs are?

Yes, I would say, you know, we have very little nonagency repo on at the moment, and that is trades at a spread to LIBOR.

Is it three-month LIBOR?

Yes, I would say three-month LIBOR since -- either one-month LIBOR or three-month LIBOR, depending on how the trading desk puts the trade on. And the larger part of our financing comes from the agency mortgage-backed securities, which in the past we would tell you that it would track relatively close to LIBOR. But currently in this market we are seeing much better -- much lower funding costs than LIBOR for the agency mortgage-backed securities.

Okay, is that because of the Fed's involvement or --?

No, I think people who have cash would rather have secured borrowing than LIBOR, which is an unsecured borrowing. So currently there is much more money available for agency mortgage-backed securities or treasuries in the repo market than for other types of assets.

Okay. And the final question, with the President signing the Dodd-Frank Bill, one of the first reactions is the credit agencies saying that they will no longer allow their ratings to be part of the offering prospectus for public deals, which many people have interpreted to mean that that means the 144A market is going to be the market for getting new mortgage-backed securities.

And I was wondering if you could comment in general as to your reaction to the credit agencies not allowing their ratings in publicly rated deals. Is the 144A market big enough to accommodate what needs to be done? But just your general thoughts on that.

Yes, I think the market will sort itself out. The rating agencies and the market participants will all figure out where they have to be.

I do think the 144A market is large enough to absorb the demand. Especially if there is not going to be a lot of supply coming in the public space, people will figure out ways to buy the 144A product. I don't think it is anything but a momentary disturbance and the market will sort itself out.

Okay, thanks very much.

Ken Bruce, Bank of America - Merrill Lynch.

I am interested in your -- the increasing composition of the senior interest [OE] positions that you're taking. Can you give us a little bit more color around what those investments are and how much you expect to retain on I/Os going forward?

Well, every time we do a resecuritization and we sell off the seniors, the rate where we can sell the seniors has been trending lower. So the seniors aren't going to really trade very well above par. So if we have a 6% coupon on the underlying, we don't want to sell a 6% senior, so we strip off an I/O and we might sell a 4% coupon at par. And then we have a 200 basis point I/O.

(multiple speakers) so the more re-REMICs we do, and as we get the seniors off the lower and lower levels, we are going to have bigger and bigger I/Os.

Right. Now, that's going to be an inverse I/O, is that correct?

No. Well, it potentially could be if we decide to sell a floater, but if we are selling fixed-rate bonds it's just going to be a WACC I/O.

Okay. And you had mentioned that you had put on additional swaps in the quarter; is that swapping out the agency risk, or is that trying to hedge some of the rate risk around these I/Os?

No, it's the agency risk.

Okay. And just in terms of, when we model this forward you have given some increasing disclosure here about what the cost basis is for each of those segments. Is that something you expect to continue going forward?

Yes, we expect to continue that.

Okay, great, thank you.

(Operator Instructions). Daniel Furtado, Jefferies.

It's me again. Sorry, I don't mean to be dense here, but I guess I misunderstood you.

This $151 million mark, this net unrealized available-for-sale mark, you said that's focused on the subordinated portfolio or the re-REMICs support bonds column. Help me -- I guess, I am just not understanding how the weighted average fair value went from 35 and change in March, up 2 points, greater than -- or about 2 points in the quarter, but there was still a negative mark on that line item.

The $151 million is on the entire portfolio. And in general, the entire portfolio moved down. You know, our book value took almost a $0.17 hit for unrealized losses. It is not related to just the subs, it was across the portfolio.

Okay. And I guess because we have more clarity this quarter -- so I guess it would be (multiple speakers) -- is that focused on the I/Os, then? I mean, it's got to be, because we know what the --.

It was across the portfolio. And you know, you have to keep in mind, the portfolio -- the additional disclosure that I gave, you should be able to kind of back into the numbers a little bit. But I broke out the I/Os because they are a significant portion of the portfolio at this time. And so last quarter that disclosure wasn't there, and so I think you are missing a little bit of information in following the movements on the numbers.

Okay.

But you'll see it going forward.

But in general, that support bond portfolio actually went up in value. It is other pieces of the portfolio that lost value in the quarter?

The entire portfolio -- across the board we had unrealized -- we had changes in our marks across the entire portfolio to the downside in all asset classes. It's just you are not seeing the breakout versus last quarter.

Got you. Okay, well, thanks for the clarity.

Jim Young with West Family Investments.

Yes, could you address some of the underlying credit trends that you are seeing in the June quarter, and is there any differentiation between the nonagency RMBS and what is held in the subordinated positions? And then, for the month of July has there been any discernible difference in those credit trends?

I mean, generally they have been moderately better to stable. You know, look -- they don't really change that much on a month-to-month basis.

I would say, just like I said in the opening statement, that to date the credit performance has been better than what our expectations were when we purchased the assets. And we are seeing a little bit of moderation in the numbers -- certainly nothing that we haven't expected, and we think we are pretty comfortable with the performance of the portfolio to date. I mean, overall we're not seeing any disturbing trends, if that's the question.

The roll rates have tapered off a bit, and as a lot of these deals get their inventory worked off the delinquency buckets are going to decrease a bit.

Ken Bruce, Bank of America - Merrill Lynch.

A short queue this morning. Can you give us some characterization to how the senior bond funding market has changed, just in terms of -- I think at mid-quarter you were seeing financing rates around 4.5%; has that changed meaningfully at all?

You know, it's going to depend on the deal. I mean, if we're doing a 10/90 split it is going to be a lot shorter bond than if we're doing a 90/10 split. But I mean we are getting stuff done with a two-handle all the way up to maybe four or five-handle.

Right. Okay, I think several of these questions obviously focus on the book value, and I think it's kind of sitting here at the beginning of August it may be easy to forget that there was quite a bit of volatility that was introduced in the credit markets back in May and June, which I assume translated into some of the lower marks that you are looking at in the quarter.

Can you give us a sense as to how maybe some of the moving pieces were affected? I think at some point in the middle of the quarter when we had a discussion, you had seen the senior financing markets were relatively stable versus the MBS markets, if that is -- if you could give us any kind of characterization how those markets have either kind of moved further apart or moved closer together?

Yes, I mean it is just a snapshot of one point, right? But I mean if you've got a big portfolio of bonds, where there is a 99.75% par market and you sell those and you have a bunch of bonds where it's a 35-40 mark, it's going to make a big difference. There's just naturally going to be more noise.

Okay, I guess what I'm really asking you is, over the course of May and June you saw credit markets back up considerably. Did that impact your portfolios equally, or was there some segregation?

Well I think the take away here is, the AAA bonds that we are selling are still meeting pretty robust demand, and we are selling them and getting good prices for them. And the subordinate bonds and the underlying collateral that we make the bonds out of has cheapened up somewhat. So that might be a disparity in the marketplace that is adding to some of the noise.

But I would just echo what Chris said -- this is a snapshot, a moment in time. And in the asset class and the distressed nature of the market you're going to see volatility in the prices of assets, and that's -- we take it as just the normal course of business.

Okay, thank you.

Ladies and gentlemen, this does conclude the question-and-answer portion of today's presentation, and I would now like to turn the conference back over to Mr. Matt Lambiase for closing remarks.

Thank you very much for participating in the second-quarter earnings call of 2010 for Chimera. And we look forward to speaking with you in the next quarter. 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 of 69000781.

This concludes our conference for today. Thank you for your participation. Have a nice day. All parties may disconnect at this time.