Chimera Investment Corp (CIM) 2011 Q1 法說會逐字稿

Good morning, and welcome 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 that all participants are in a listen-only mode.(Operator instructions) At the request of the Company, we will open the conference up for questions and answers after the presentation.

This earnings call may contain certain forward-looking statements within the meaning of 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 a future period or periods or by the use of forward-looking terminology, such as may, will, believe, expect, anticipate, continue, or similar terms or variations of those terms or the negative of those terms.

Actual results could differ materially from those set forth in forward-looking statements due to 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 markets 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 rate mismatches between our investments and our borrowings used to fund such purchases; changes in interest rates and mortgage prepayment rates; effects of interest rate caps on our adjustable rate investments; age of defaults 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 and 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 Ractors 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 will now turn the conference over to Mr. Matthew Lambiase, President and Chief Executive Officer. Please proceed, sir.

Thank you. Good afternoon and welcome to the first-quarter 2011 earnings call for Chimera Investment Corp. I'm Matt Lambiase, CEO and President, and joining me on the call are Alex Denahan, our CFO; Chris Woschenko, our head of investments; Rose Lyght, the CIO of our manager. FIDAC; Choudhary Yarlagadda , the head of structuring; and Jay Diamond, a managing director at FIDAC and a member of Chimera's Board of Directors.

And we'll all answer your questions after some brief comments.

The US housing and mortgage markets continue to have their challenges; nonetheless, Chimera continues to deliver a high-teens return on equity while operating with very low leverage. The large shadow inventory and slow absorption rate will most likely keep home prices under pressure for the foreseeable future. Certainly the first quarter's housing data showed a weakness in home prices across almost the entire country. It's troubling that these declines are happening when the unemployment rate is actually improving. Home prices and unemployment are generally considered to be correlated. Perhaps we should question the validity of the jobs numbers. Nevertheless, if this trend continues, it could cause the rating agencies to reevaluate their rating criteria on the senior bonds issued in re-REMIC transactions.

While we believe that the prices of the underlying collateral is still priced to severe loss assumptions, we do think that there is some risk in having levered position in nonagency senior re-REMICs. In the first quarter, we took advantage of a very strong market for senior re-REMICs, and we sold substantially all of Chimera's position in these bonds and reduced our repo borrowings in nonagency credit to zero. The capital was invested into relatively attractive agency mortgage-backed securities, thereby retaining liquidity and flexibility to redeploy into credit in the future.

As all of you know, the cash flow of mortgage-backed securities are variable, especially when compared to traditional fixed-income bonds, which pay interest and principal on a set schedule. Principal and interest payments on mortgage-backed securities are lumpy and reflect the individual payments on sometimes thousands of loans that back each security. Increases or decreases in prepayments, liquidations, delinquencies all affect the cash flows Chimera receives every month.

In our portfolio, we've experienced slower voluntary prepayments, largely, we believe, because of the lack of available credit and the lack of owner's equity makes it difficult for borrowers to refinance or to move. We've also noticed that the timing of liquidations of our delinquent loans and our securities can be somewhat erratic. The foreclosure moratoriums enacted last year slowed liquidations in the fourth quarter, only to increase them in the first quarter, as services raced to catch up with the backlog.

Investors in our shares should expect some volatility because of the nature of these variable cash flows and the vagaries of regulation. But despite the lumpiness of our cash flows, I want to remind shareholders that to date our portfolio's credit performance has been better than what we modeled when we purchased the assets. We expect and have planned for losses to increase in our portfolio over time. The portfolio was bought at a significant discount to par, over $2.0 billion of discount, and realized losses over time will be absorbed by the discount. We believe that the discounted price of our portfolio should provide us with significant advantages, even with the prospect of declining home prices ahead.

As I have said before, the mortgage-finance system in the United States is undergoing a period of tremendous change on a number of fronts, such as dealing with the housing and credit overhang from the bust of the housing bubble, contending with the regulatory policy changes, and adapting to the reduced ability or desire of financial institutions to hold residential mortgage credit. Chimera is currently well positioned to benefit in this environment. We are delivering a high teens return on equity with very low leverage. This affords us the flexibility and liquidity to take advantage of opportunities in the turbulent market ahead, and we believe Chimera is in a unique and enviable position.

With that, operator, can you please open the call for questions?

Thank you. The question-and-answer session will begin at this time. (Operator instructions.) Henry Coffey of Sterne, Agee.

Good morning, everyone. Thanks for your time. Just three quick questions, and then maybe you can address them. Is the idea -- it seems you sold your senior bond but kept the [subs.] How does that tie into your view that you're worried about the performance of these assets?

We sold the senior bonds because we didn't want to maintain the downgrade risk on our balance sheet. But as far as our subs go, I mean the sub risk is what we were looking to take all along. And, thus far, I think our portfolio has been performing as well as you could've possibly hoped. So the fact that we think that there might be some decay over the next few years, I think was something we have modeled in, and I think all that happens is it produces more opportunities for us.

So by holding the -- now, the sub notes are financed either with permanent -- (multiple speakers)

Those are for cash.

No. We own them for cash, and they're locked out.

Excuse me?

We own them for cash. The sub pieces that we have --

Right.

-- we own for cash. The nonagency senior bonds we had were on repo, and you have downgrade risk in the future. We think there could be downgrade risk in the future.

Yes. So you own sub stuff for equity, but it's not (inaudible - multiple speakers) --

That's right.

And then, the higher principal write downs that occurred this quarter, were they related to these concerns or -- ?

No. I think we expect over time, as the original subordination on the bonds in our portfolio start going away, you'll see losses come in. The realized losses will come into our portfolio over time. I mean, that's just part of what we expect to happen, and you'll see that.

And then do we assume that you're not going to raise any more equity and just -- [since you've] deployed the equity you have into the agency market? Or, how are you going to -- how is the portfolio going to change over the next few quarters?

How is it going to change? Oh, if you could tell me what the market's going to look like -- I mean, we're going to be poised to take advantage of whatever comes our way. I think the overriding things or trends in the market that we're seeing is that the housing market itself is getting weaker, the home prices are getting weaker, and there's still a tremendous amount of liquidity in the market. The government's been doing QE2 and maybe QE3, and there is kind of a disconnect between prices and assets and the actual underlying -- what's going on with credit. And we think it's better for right now to maintain low leverage, which we're [continuing] to maintain. We have a very high return on equity, and there's a huge amount of opportunity for us if things change in the future.

What were your swaps relative to your repo?

The swaps showed a notional of $950 million.

$950 million.

And they have a weighted average receive rate of 23 basis points, and the pay rate on them was 263, I believe.

Thank you. You've put together a good quarter in a pretty rough environment. So congratulations.

Thank you, Henry.

Bose George of KBW. Please go ahead, Mr. George.

Good afternoon. I had a couple of things. First, just on the cost of funds, I was just -- the [wet] down, was that just the fact that you paid off the nonagency repo, and now the cost of funds just reflects the agency repo and the swaps?

Yes, sir.

Okay. Great. And then in terms of unlevered yields on incremental investments of the nonagency side, where do you see that at the moment?

On the underlying collaterals in the high single digits, and re-REMIC'ed, it would be in the low double digits. It depends very much on what kind of collateral you're buying and re-REMIC'ing.

Okay. Great. Thanks very much.

Steve DeLaney of JMP Securities.

Good afternoon, everyone.

Hi, Steve.

The increase in the agency book of about $2.8 billion, I guess just by the whack of 4.7, should we assume that that looks like mostly 30-year pass-throughs?

Yes. I think by and large, it's all 30-year pass-through (inaudible).

Steve, this is Rose. It's a combination, primarily 30 years, but we do mix some other 15 and 20 years in there.

Okay. And did you do anything -- I didn't see it in the press release, because in the past, the swap book I think at Chimera was only about $450.0 million at the end of last year. Did you step up your swaps when you --

Yes. We have $950.0 million on now, and as we look at it and depending on what happens with the market here, we're going to adjust it depending on how the market plays out.

If we keep getting these kind of job reports that we're getting, you may not have to hurry on that.

No. I think that --

And I know you're watching it, but I'll tell you.

Yes. We watch it every day.

If you would've told me it was going to be down 50 basis points in the last three or four weeks, I wouldn't have taken that bet. And I guess the last thing, we know -- I mean, the losses coming -- and you talked about the lumpiness. I think, Matt, you and I talked a month or so ago, and the moratorium and all certainly makes sense. I just want to make sure I understand the accounting. When you run your realized principal losses through a separate line in your P&L, but we know that economically you've got the discount, if you paid 60 or 70 for a bond, you've got that principaldiscount there as well. So as you are realizing these losses, is there not another piece? I mean, the discount is being accreted in as well because of the repayment; right?

Yes, that's correct.

Okay. So it's just that -- in other words, the loss, instead of the loss going through the discount like as if it was a reserve, it's actually --

Absolutely.

But it's the same thing; right, Alex? It's just visible on your -- everybody that owns nonagency RMBS is getting principal write-downs.

Absolutely.

It's just a question of whether you run it through some kind of accounting reserve or whether it runs through your P&L?

That's correct.

Okay. Great. I just wanted to clarify that. Thanks, folks.

Thank you.

(Operator instructions.) Stephen Laws of Deutsche Bank.

Good afternoon. Thanks for taking my call.

Hi, Stephen.

I guess as we look a little longer out, you know, as we see conforming limits come down, will you guys look to be active in acquiring whole loans, nonconforming loans, and looking to securitize those? Can you give us maybe a longer picture as we see valuations recover in the kind of legacy or senior class RMBS assets?

Yes. I think that's right on from what we've -- we started the Company buying whole mortgages and then securitizing them, and I think that's where we will end up going back to. The Company or management has been spending quite a bit of time recently developing and thinking about how we want to source jumbo loans from high-quality borrowers going forward, and I think that's exactly what we're going to be doing. I think there's going to be -- especially depending on how the QRM and all the different aspects of regulation pan out, I think there's going to be a lot of opportunity for private capital in that space. And I think Chimera is well positioned to deploy capital in great amounts in the jumbo prime markets.

And I guess it's a question everybody's wondering, but what are your views on that playing out? I guess the conforming loan limits are supposed to come down, I think, in October, and we'll continue to see GSC reform. But can you maybe talk about the time of you all's timing on how you think the market's going to mature and kind of return back to normal functioning in the securitization markets?

Yes. I wish I had a very clear answer for you, to tell you the truth. The market itself, the jumbo prime lending market, there's not a tremendous amount of activity there. There seems to be a couple of log jams with regard to the rating agencies and how they view the securitization model going forward. Then we're just going to have to work out how banks are going to be operating in that market. I think, you know, once the rules are clearly defined by the government and the rating agencies, we'll be able to give you a better answer. But I think it's going to be slow going for the next several months.

Okay. And I guess one last question. I know pricing's recovered, so ROEs today are not the same as what they were 4, 6 quarters ago. But can you talk about maybe putting new money to work today, what type of ROEs you think you could see, given pricing and the leverage levels and securitizations, re-REMIC [spreads] that you're able to achieve.

I mean, re-REMIC subs would be low double digits.

Great. Thanks for taking my questions.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Lambiase for our closing remarks.

Thank you for participating in the first-quarter 2011 earnings call for Chimera, and we look forward to speaking with you next quarter.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 877-344-7529 or 412-317-0088 with an ID number of 450685. This concludes our conference for today. Thank you for participating and have a great day. All parties may now disconnect.