Chimera Investment Corp (CIM) 2010 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter earnings call for Chimera Investment Corporation. At this time, I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. (Operator Instructions). At the request of the Company, we will open the conference for questions and answers after the presentation.

This earnings call may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions, some of which are beyond our control, may be identified by 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 on those terms, or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, our business and investment strategy; our projected financial and operating results; our ability to maintain existing financing arrangements, obtain future financing arrangements, and the terms of such arrangements; general volatility of the securities market in which we invest; implementation, timing and impact of and changes to various government programs affecting the capital markets and the economy; our expected investments; changes in the value of our investments; interest rates mismatches between our investments and our bonds used to fund such purchases; changes in interest rates or mortgage prepayment rates; the effects of interest-rate caps on our adjustable-rate investments; rates of default or decreased recovery rates on our investments; prepayments of the mortgage and other loans underlying our mortgage-backed or other asset-backed securities; the degree to which our hedging strategies may or may not protect us from interest-rate volatility; effect of and changes in governmental regulations, tax laws, and rates, accounting guidance and similar matters; availability of investment opportunities in real estate-related and other securities; availability of qualified personnel; estimates relating to our ability to make distributions to our stockholders in the future; our understanding of our competition; and market trends in our industry, interest rates in the debt securities markets or the 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 results 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'll now turn the conference over to Mr. Matthew Lambiase, President and Chief Executive Officer. Please proceed, sir.

Thank you, Amy. Good morning and welcome to the fourth-quarter 2010 Chimera Investment Corp. earnings call. This is Matt Lambiase, President and CEO, and joining me on this call this morning is Alex Denahan, the CFO, Chris Woschenko, the Head of Investments; Choudhary Yarlagadda, the Head of Structuring; Rose Lyght, the CIO of our Manager, FIDAC; and Jay Diamond, the Managing Director at FIDAC and a member of the Board of Directors of Chimera.

I'll make a few brief comments. Alex will review the results of the quarter, and we are all here to answer questions afterward.

In November, the Company executed a $546 million secondary stock offering. The proceeds were deployed into what we believe are attractively-priced mortgage-backed securities and the result should be evident in our future earnings releases.

Among the investments we made were blocks of non-agency and mortgage-backed securities sold as part of a well-publicized bank divestiture at the end of the quarter. We acquired the securities and restructures them into investments that we believe will provide attractive loss-adjusted returns.

Liquidity is still increasing in the non-agency mortgage-backed securities market. This has enabled us to re-securitize mortgage-backed securities and sell new bonds that are rated all the way down to single-A. In the past, we were only able to sell AAA-rated bonds that resulted from the securitizations. Being able to sell to the single-A attachment point allows us to create investments that have longer duration and high relative yield.

We continue to see attractive investment opportunities, and the mortgage market remains, in our opinion, the most attractive investment option in all of the fixed income markets.

We think investors need to be aware that the mortgage market and residential mortgage securitization is in the process of significant change. There are new legislative and regulatory proposals focused on the reform of the GSEs and bank capital guidelines that may have a profound impact on the mortgage market. Much of the discussion involves understanding the conditions that would facilitate a more substantial involvement by private capital.

We would argue that mortgage REITs could be the ultimate source of long-term buy and hold foundation capital for the mortgage market, and it should be a significant part of the solution the government is looking for.

The mortgage market is broad and complex. It requires large amounts of capital and expertise. It is more important now than ever before to have size and scale to invest effectively in this market.

Chimera is well-positioned, being the second largest mortgage REIT and one of the largest public investors in residential mortgage credit allows us to see and evaluate most major capital flows in the market. Our size lets us compete today with large banks when we restructure assets, and will afford us the platform to underwrite and securitize new jumbo mortgages in a meaningful way when it once again becomes economically attractive to do so. We have the personnel, the experience, and the availability of capital to take on the new challenges, and we look forward to it.

Alex, you can discuss the quarter's results.

Chimera reported core earnings for the quarter ended December 31 of $136.2 million or $0.14 per share. We reported GAAP income for the quarter of $156.2 million, or $0.16 per share. We declared a dividend for the period of $0.17 per share producing an annualized dividend yield of 16.55%. Our book value at December 31 was $3.23, and our leverage was slightly less than the prior quarter at 1.2 to 1.

Our portfolio composition is slightly more heavily weighted towards subordinated interest and non-agency RMBS. Overall, the portfolio is approximately 84% non-agency RMBS, 13% agencies, and the balance is in securitized loans.

During the quarter, net interest income was largely unchanged. This is reflective in part to the signing of the settlement of our asset purchases, to a decline in the net accretion of discounts and the amortization of premiums, and to a decline in the weighted average coupon in the portfolio as a whole. The decline in the net accretion reflects that our portfolio composition includes a larger portion of interest-only assets that amortize rather than accrete.

During the quarter, we sold RMBS at the carrying value of $590 million for realized gains on sales of $7.7 million. We did not engage in any resecuritization transactions. In addition, we financed on a nonrecourse basis through sales to third parties, $166 million of AAA-rated seniors for net proceeds of $168 million. At this time, we will turn the call back over to the operator and answer any questions you may have.

(Operator Instructions). Bose George, KBW Securities.

Good morning. I had a couple of questions. First was on the asset purchases. So did some of that close after the quarter end? And if so, how much was that amount?

We had a significant portion that settled on the last day of the year. In addition, we have $127 million that was a forward settle, which would settle early in 2011.

Okay, great. And then just wanted to dig in a little bit on the book value. I know marks can be sloppy at year end, but just curious if there were parts of the book that moved more than others. It was a little surprising just given the rally on a lot of credit-sensitive assets that happened last quarter and continues. So any color on that would be great.

In general, I'm going to comment on the specific assets in our portfolio, and then Matt and Chris can talk about the market in general.

A large or -- the largest portion of our portfolio is in subordinated interest. And if you just look at the change in amortized costs versus the change in fair value, the weighted average numbers that we released, you will see that the amortized cost increased more than a change in the weighted average fair value. And so you have to take that into consideration that the largest part of the portfolio in the subs did not move enough to cover its change in amortized cost. Now every quarter, we accrete a certain amount of discounts, and for this quarter, it was roughly $60 million. Before you will ever see a gain in our market value, you have to cover the fact that your cost basis is increasing by that amortized cost.

And so, the marks did move. The subs in general, the fair value movement, did not exceed the movement in the amortized cost.

Yes, that definitely makes sense.

Okay. And then on top of that, we have consolidated trusts that we no longer own the seniors on. And if you look in our Q's and in our K, on note 5, we say that those seniors, even if the seniors move in price, if we sold them to third parties, I do not adjust that fair value because that's an increase in asset value that Chimera can never capitalize on. So the seniors that are sold to third parties, even though they may have moved in the market, in the broader market, I do not take the market value up because Chimera does not own those assets and cannot ever achieve the economic gain in the value. So the $2 billion that sits on our books of seniors non-retained does not reflect any market value movement on that portion.

I would just add that the majority of our assets are subordinate bonds on distressed assets. They're not what you would consider the most liquid assets in the world, and they do trade with a pretty wide bid/ask spread.

So you do -- when we get dealer remarks, there tends to be a pretty wide variance as far as where they are. And we take an average, so it is a little more difficult for us to get -- for the price of those to actually move up significantly.

Okay, great. Thanks a lot.

Douglas Harter, Credit Suisse.

I was wondering if you could talk a little bit about the at-the-money stock issuance that you guys announced last week; sort of your plans for using that and how we should think about that going forward.

Yes, I think the way we think about it is that there are opportunities in the market that we see as the market evolves, that could require smaller amounts of capital than large capital raises, and it just gives us flexibility. And we don't have any plans at the moment.

Great. And then just to sort of talk more about the book value, I guess the way I've been thinking about it was that if the -- kind of the underlying asset prices have continued to increase, that that should reflect more in the value of the subs, and therefore I would have expected a stronger book value performance. I guess if you could just maybe try to help me understand why that doesn't necessarily flow through into the sub bonds.

Like I just -- I said, they're not really the most liquid assets in the world. And you could get bid/ask spreads on them at 10 points. So, we get three marks and we average them. We can have a high to a low average mark; in some cases it's 20 or 30 points. So those tend not to move up as quickly as the rest of the market, given that they are pretty illiquid, and it's more of a distressed market. It doesn't really trade tick for tick with the treasury market.

All right. Thank you.

Daniel Furtado, Jefferies.

A couple questions. Can you help me understand, unless I just don't understand what you were saying earlier about the -- I'm trying to figure out what the weakness in the non-retained interest income was generated from.

When we consolidated trusts, we split the assets -- you take the assets back on your books by assigning your amortized costs based on the relative fair value on the day of the securitization. Okay? So, the seniors may have come back on our books at 98 and the subs came back on at, we'll say 20.

The accretion on the trust each quarter as it flows through the financials, I first, because of seniors, receive all the principal first; you first accrete the seniors to par. And so, if they came on at 98 and they have paid down 30%, the accretion all went to the seniors, so the senior could be at par now and the sub could now be receiving the discount simply because I can't accrete above par. You go to par and then you stop.

So there's a movement -- the trust itself -- the underlying accretion on the trust itself, that number did not change quarter over quarter. It's just whether it went to the non-retained portion of the consolidation or to the retained portion. And so net-net, the accretion on those five trusts that we have consolidated changed very little quarter over quarter. It's just it went to the retained portion and not the non-retained.

Okay, okay. So should we expect similar levels of non-retained interest income from the fourth quarter going forward? Kind of like this step down, this step down that we saw between 3Q and 4Q should now kind of run at this lower level on a go forward?

Well, the thing is, is we accrete the discount on a CUSIP by CUSIP basis, so depending on how the underlying CUSIPs pay, could change the allocation, because we take each piece back on at its own cost basis. So it could move.

I wouldn't expect it to move significant. It will move around a couple million a quarter I would expect, just depending on the underlying.

Now, as you know, there was a large restatement in one of the trustee reports, so that could change -- you could see a one-period movement that's more outsized than others. But it's just -- it's subject to how the underlying CUSIPs pay.

Okay. And then another question is -- maybe I have my lines crossed here, but you did complete a resecuritization in the fourth quarter, correct?

No, we did not complete a resecuritization. We sold seniors from prior deals. We participated in a resecuritization.

It's a consolidation issue. We didn't do anything on our balance sheet. We bought bonds and we -- we bought subordinate bonds.

Right. We bought straight from a dealer's resecuritization.

Understood. So that what you sold was stuff that you had already -- AAA's you had resecuritized but just hadn't sold.

In prior deals, yes.

Okay. And what about -- sorry, last question here -- can you help me understand or what kind of management thoughts are right now as we look at the new issuance market and kind of -- the longer-term plans for Chimera.

My understanding is that you guys aren't going to be in the re-REMIC business forever, and at some point this game shifts to a new issuance type of investment strategy. But can you just kind of help us understand what management's current thoughts are in regards to that new issuance market today?

Yes, I think that's exactly right, Dan. I think the new issue market for jumbo prime mortgages, I think will come back sometime in the near future. Hopefully sooner than later. I think we have some challenges right now. I think people are still trying to get their arms around what's going to be a qualified mortgage and how the banks are going to play in the space, and the risk retention that is going to be in the marketplace.

If banks can't make adjustable rate mortgage prime jumbo -- adjustable rate mortgages and securitize them, that will be a great place for people like Chimera and other mortgage REITs to play.

I think where we will go are areas where generally the banks will not be able to efficiently compete. And the rules of that aren't laid out clearly at the moment.

And, I think right now, the opportunity for us is probably looking at packages of already existing loans than new issue securitization. And I think it's -- I think there's just going to be an outstanding opportunity for us in the future to do these securitizations.

Excellent. Thanks for your time. I appreciate it.

Stephen Mead, Anchor Capital.

So just to get this sort of cleared up in my mind a little bit, the new equity that you issued in the fourth quarter, in terms of actually putting it to work, how much of it got put to work? And is there some way to kind of look at what the hit to earnings was associated with not having it at work?

Yes, I think that's -- I think one of the things is we put the money to work, it's optimization of the portfolio. It's how many times can we get securitizations -- the whole -- the end game for us is to do or buy resecuritized sub bonds and aggregate them and portfolio them.

And you can put the money out. We can invest the first time and then you have to spend the rest of your time optimizing the portfolio, selling off senior bonds and creating sub bonds in the portfolio.

And we had a little bit of a head wind in the fourth quarter, in the late fourth quarter from S&P. S&P admitted that they had a glitch in their reading system, and they put everything on hold in the marketplace. Then for a couple of weeks, there was not a lot of activity in the resecuritization mortgage market. So, we've been investing, and I can say right now I think we are invested with the capital that we raised back in November.

But there was -- you missed in a sense some earnings associated with that capital though.

Well, and also the way we've been resecuritizing and putting the money out is a little bit different than the past. Like Alex said, we had 25% of our investments settle on the absolute last day of the quarter. So, you don't get the benefit -- the interest benefit -- of having those for the period.

And then refresh my memory as far as -- how do you determine what you're going to pay in a dividend from a quarter-by-quarter basis?

The dividend is an estimate of our taxable income for each quarter. And so, we compute an estimate of what the taxable income is on the portfolio, and declare a distribution based on that figure.

So when you declared the $0.17 for the fourth quarter, when was that again? And how did your estimate of taxable income compare to (multiple speakers)

The taxable income we declared, we typically declare that early in the third month of the quarter, early to mid in the third month of the quarter. And our taxable income came in close to that figure.

To the $0.17?

Yes.

Okay. And then just from a return on equity standpoint, how does the market look today versus six months ago, whatever, in terms of the kind of returns that you can generate from your activity?

That's right. Steve, I think the yield on all credit instruments over the last year have come down. And a good example I think of that is if you just take a look at the high yield index, it's now yielding 7% for junk bonds. I think the bonds that we are creating today, we're selling down to single-A and they having a mid teens loss-adjusted to our loss assumptions. And I think that's the best investment choice that you can get anywhere in the marketplace.

And I think certainly it's come down from where it was a year ago, but I still think it's just really -- it's so much better than anything else out there.

So the bulk of the portfolio we created back yields were higher, and two years ago, the bonds are now getting shorter. And the portfolio is beginning -- we started to see some bonds start to pay down in the portfolio.

In order for the Company to continue to pay out an above average yield to the investors like we've been doing, we need to add duration or length in the portfolio. And I think that's exactly what we're doing here. These bonds are relatively attractive at 15% or whatever the midteens type of return we're creating. But more importantly, the average lives, because they are more -- we're selling down to single-A, they are six- to eight-year average lives on them.

So aggregating these today means that we can continue to pay out I think an above market return going forward. That's what we're hoping for. And really building a portfolio, making it longer today I think is going to pay us huge benefits into the future.

Okay. All right, thanks.

Steve DeLaney, JMP Securities.

Good morning, Matt. Most of my questions have been covered already. I just -- there's one topic that is sort of a minor thing, but I'm just curious if you can give us a little color.

Annaly announced that they had funded and set up a warehouse lender called -- a resi warehouse lender called Shannon Funding. So looking down the road, as the opportunity with sort of setting up a conduit and doing your own private label issuance, is that something that could play into that, where you could see a source of new jumbo loans coming in to Chimera through Shannon?

Yes, I think that could -- those plans are being laid out, and the foundation is being formed now. And I think we will look at all those opportunities in the future. I will also say that there are a lot of other lenders out there, banks and other types that have demand for loans that the bank portfolios don't want right now.

And one of the challenges for us going forward is to figure out how to effectively securitize that and work with the rating agencies. And I think that's, like I said before, a very large opportunity for this Company.

Especially if the GSE reform puts a lower cap on the ability to GSEs to tap into the jumbo market too, I assume.

That's going to -- it could be a very -- it could be a fast break for the Company, yes.

Okay. Well good luck at that as the year moves on. Thanks.

(Operator Instructions). Henry Coffey, Sterne, Agee.

Good morning, everyone. Thanks for taking my question. I'm sort of looking through some of the detail that you've been sharing with us. You break out the I/Os and the subs etc., which is all very helpful, but if we look at that balance sheet, the pricing ratios that you've shared with us, can you tell me a little bit about the character? The I/O's are associated 100% with the senior non-retained securities. Is that correct? Or do they have a life of their own? The senior I/O's were in essence created with the senior non-retains? Is that the way to think about it?

Yes. That's correct.

And then, the sub I/O's of course, were -- where would they -- what securities were they related to? I mean not buying I/O's. You're -- I think you've explained that to us in the past, so that's helpful.

We own all the I/O which is being shown on the books. And only the senior non-retained securities are the principal portion, which has been termed out into the market.

Right. And so the sub I/O is also retained with the senior?

Yes.

As a portion of the -- if you were to put everything back together again, all the I/O's are associated with the non-retained securities. Is that the way to understand it?

Whatever is shown in that statement, we own on the I/O.

The sub I/O contains some pieces that were not part of our securitizations. The senior I/O is all pieces associated with our securitization.

And where are some of the sub I/O's created in addition to the --?

(multiple speakers) purchased them straight from the street. If there's a sub I/O on the street. The senior I/O, we could buy those straight from the street as well, but the vast majority of our assets are associated with securitizations that we either participated in or structured.

And then looking at the balance sheet detail that you gave us, what portion of your sub security that you are holding now were sort of securities that you created, and what are securities that you purchased outright from -- with somebody else holding the senior?

I'm not sure why it would make a difference, but it's a wide range and it changes quarter over quarter whether we do a resecuritization or not.

Okay. And then finally in just kind of looking at the numbers, you were running core earnings around 16 or 17. Is it -- are there dynamics that would get that number back to that level again? Or is sort of 14, 15 the new run rate?

We think that the level of income, the return on the investment, is a very attractive level as it stands. Having said that, we've pointed out a couple items in our comments in the beginning of this call of why we thought the interest income number was flat quarter over quarter. So if you consider those items, I think you could make a judgment from there.

And if I understand it right now, you have not exercised the ATM. There's been no new share issuance since the end of the quarter?

That's correct.

Thank you. Thank you very much.

Stephen Mead, Anchor Capital.

If I could, what -- in terms of the thing that was in the newspaper as far as what's going to happen with the GSEs, do you guys have any kind of more insight to what would be the logical kind of first steps? Clearly they're going to bring the balance sheet down. Clearly they change the guaranteed portion. Will there be restrictions on what the banks can do and cannot do?

Steve, Mike Farrell will be testifying in front of Congress next week, so we're a little restricted on what we feel comfortable saying.

I would say -- I would agree with you. I think that if there was a first step here, I think we know that the maximum amount of balance that the agencies can fund is going to come down this year, at least by September. Maybe they speed that up so they are not going to be able to fund anything over 730. Probably bring it back down into the 400's. And I think that's opens up an opportunity, like I said before, for players like ourselves to be the capital solution if you will or the mortgage funder for people that want a mortgage that's greater in balance than what the agencies do.

With regard to the portfolio and the forward business, it's just a guess on anybody's part at the moment.

Okay.

(Operator Instructions). This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, thank you all for participating in the fourth-quarter 2010 earnings call, and we look forward to speaking with you next quarter.

Ladies and gentlemen, if you wish to access the replay of this call, you may do so by dialing 877-344-7529 or 412-317-0088 with an ID number of 448264.

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