Chimera Investment Corp (CIM) 2014 Q2 法說會逐字稿

Good day and welcome to the Chimera Investment Corporation Second-Quarter 2014 Earnings conference call and webcast.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to [Willow] Sheridan.

Please go ahead.

Good morning and welcome to the Second-Quarter 2014 Earnings call for Chimera Investment Corporation.

Any forward-looking statements made during today's call are subject to risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the forward-looking statement disclaimer in our earnings release, in addition to our quarterly and annual filings.

Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date of this earnings call. We do not undertake, and specifically disclaim, any obligation to update or revise this information.

Participants on this morning's call include Matthew Lambiase, President and Chief Executive Officer; Rob Colligan, Chief Financial Officer; Mohit Marria, Chief Investment Officer; Bill Dyer, Head of Underwriting; and Choudhary Yarlagadda, Head of Structure. I will now turn the conference over to Matthew Lambiase.

Thank you, Willow.

And thank all of you for joining us this morning on the Second-Quarter 2014 Earnings call.

Before we open the call up for questions, I'd like to discuss some recent portfolio activity and also talk about how the Company is currently positioned in the market. And then I'd like to turn the call over to Rob to go over the financial results of the second quarter.

We had a significant amount of activity in our portfolio in the first half of this year. In the first quarter, we took advantage of the strong demand for credit assets by repurchasing all the existing senior debt on a $540 million non-agency re-REMIC deal that we had consolidated on our balance sheet. We then collapsed the trust and sold the underlying bonds. That transaction narrowed the difference between our GAAP book value and economic book value, and resulted in a $25 million gain.

In the second quarter, once we believed we were going to be current on our financial statements, we increased the size of our balance sheet. We purchased $6 billion in agency mortgage-backed securities and funded them with repo, and hedged them with a mix of swaps and futures.

The additional agencies increased Chimera's total portfolio to $12.4 billion, which is supported by $3.4 billion of equity, giving us a leverage ratio of 2.6 to 1, which puts Chimera in the lower range of leverage in its peer group. At this leverage ratio, we feel confident that we'll be able to earn our current dividend run rate, which puts us at an attractive level versus our peer group. And so the Board of Directors has preannounced the third and fourth quarter dividends of 2014 at $0.09 per share.

Chimera's earnings are largely driven by its $4.4 billion non-agency residential mortgage credit portfolio. This portfolio was purchased during 2009 and 2010, at a time when few market participants had liquidity. Market yields at that time were higher than they are today. And it would be very difficult to replicate a portfolio of the size and quality in today's market.

Because we restructured the bonds into re-REMIC securitizations and sold off the senior tranches, we now have the majority of our credit portfolio invested in longer-duration assets that are largely locked out from prepayments. This is important because it means we have a high-yielding portfolio that has minimal reinvestment risk in the current low rate environment. We estimate that we'll have less than $200 million of non-agency paydowns in the year ahead, which is very manageable for us.

Operating at low leverage has its obvious benefits when interest rates rise, but also provides for flexibility as the investment landscape changes. We maintain the ability to add leverage in order to help us produce consistent returns over the quarters ahead.

In July, we added experienced talent to our investment team to participate in the agency guaranteed project loan market. Project loans are loans secured by multifamily buildings, assisting living facilities, and government housing. The project loan market is one of the few areas in the mortgage space that's exhibited growth over the last year. And looking at the housing starts numbers, which show increased multifamily construction, we expect this trend to continue. Project loans offer a compelling leverage return, and we plan to opportunistically add them to our portfolio over the course of the next year.

Looking forward, I believe Chimera can earn a consistent attractive risk-adjusted dividend while keeping overall leverage at a reasonable level. By operating at lower leverage, we retain the ability to take advantage of opportunities when they arise. And as we've seen before, markets that endured low volatility for long periods are often punctuated by high-volatility events. It's beneficial to have capital to invest when these events happen.

Considering the low-return/low-volatility environment that we're in, and all the economic and geopolitical uncertainty in the world today, I believe Chimera's well-positioned to benefit from any market volatility while delivering attractive risk-adjusted returns.

And with that, I'll turn the call over to Rob Colligan.

Thanks, Matt.

Good morning. I will now provide selected financial highlights for the second quarter. In the second quarter, the Company reported net income of $105 million compared to $100 million for the first quarter of 2014. Net income for the first six months of the year was $205 million compared to $223 million for the first half of 2013.

At quarter end, GAAP book value was $3.35 per share, an increase of 2% from the end of the first quarter and an increase of 3% from year end. Economic book value was $3.09 per share, an increase of 2% from the end of the first quarter and an increase of 10% from year end. The increases in book value reflect favorable market fundamentals for both Agency and Non-Agency RMBS during the second quarter.

On a year-to-date, basis economic book value increased more than GAAP book value, as the portions of the re-securitizations retained by the Company and reflected in the economic book increased in value more than the collateral of the re-securitization trusts consolidated by the Company and reflected in the GAAP book. For further explanation of the securitizations, we have posted a new exhibit on our website that explains the securitization process and differences between GAAP and economic book value.

For the second quarter, the yield on average interest earning assets was 7.84%. And the annualized cost of average borrower funds, including net interest payments on interest rate swaps, was 2.92%, for a net interest spread of 4.92%; net interest margin of 5.93%; and return on equity of 12.38%. Asset yields and net interest margin declined from the first quarter 2014, driven primarily by lower yielding agency purchases.

Although our return on average equity increased in the first quarter from 11.98%, and importantly net interest income as a percentage of average equity was 12% this quarter, up almost 100 basis points from 11.04% last quarter. Further, since the agency securities were purchased at various points during the second quarter, interest income for the quarter is not fully reflective of the earnings potential of the portfolio at quarter end.

The annualized dividend on the Company's common stock, based on the quarter-end price of $3.19 and quarterly dividend of $0.09, was 11.3%. That concludes my remarks.

And we'll now open the call for questions.

(Operator Instructions)

Steve DeLaney, JMP Securities.

It's very nice to be back on a quarterly call with you.

Thank you, Steve.

The first thing I wanted to ask about, if we look at the securitization detail on Page 8 of the supplement, it appears in the second quarter you've added a new transaction, the 2014-4R. And that seems maybe it'd be structured a little differently than some of the priors in that we don't see any seniors sold. Matt, I just wondered, can you talk about that transaction? What the collateral is and what the structure is? Thank you.

Sure. This is Rob Colligan. So if you take a look at the detail, a lot of the collateral in the 14-4R deal was actually from the 1012-R deal from the middle of the page.

Yes.

So we were able to collapse that deal, narrow the GAAP to economic spread, create a little bit more of a liquid and marketable security, but in that deal, the 14-4R deal, if you look at it in Bloomberg, there's more to it. We retain 100% of certain tranches, which we're following what's called silo consolidation. So we're consolidating the tranches of that deal where we bought 100% of it. And each tranche from that deal is essentially collateralized by a single bond. So there's no cross-collateralization in the deal, which is why we're consolidating it. But unlike other deals, we didn't buy a whole pool and sell the seniors and retain subs. We just retained certain pieces, but are following consolidation accounting for that deal.

Okay. So essentially the same collateral and the same credit risk, just in a -- and it's kind of just been repackaged, but you essentially have, I guess, very similar economic exposure and opportunity as you had before? Is that fair?

That's correct. And importantly there's no debt on it.

Okay, great. Unlevered, yes.

That deal, if you looked back to old supplements, there was only about $50 million worth of debt left on that deal. So it made sense to optimize it by doing what we did.

Okay. Thank you. And moving a little more big picture. Back in 2012, when RMBS 2.0 was starting to get some legs, you guys were in three transactions. We've had some rough times in the past year, but we're seeing more liquidity and some new issues even coming from the large banks. And hearing that issuer economics have improved. I wonder what your views are on the prime jumbo securitization market, and if we might see you become active there again?

Thank you, Steve. We are always looking at the prime jumbo market. And right back in 2012 we did three deals, roughly $1.5 billion worth of securitizations, and the economics back in 2012 were a lot better than they are today. When we look at the jumbo prime securitization market, the economics just really aren't that compelling to us and the way we look at the market. If we bought $100 million worth of loans, Chimera would basically put the loans into a trust, securitize them, and we retain probably the bottom $7 million or $8 million, the credit risk in the transaction. And we'd sell off 92% in AAA's, the higher-grade stuff.

Owning the sub-bonds, that bottom $8 million or $7 million piece of the transaction, historically we've gotten returns over 10% owning that credit risk. And currently, that sub-stack is trading around, to our loss models, around 5%. And it just doesn't make an awful lot of sense to us to be adding that type of risk to the portfolio. We constantly monitor it. We still have an underwriting department. We still have structuring people. We're always looking at it. Just the risks and the rewards aren't that compelling to us at this moment. There are better things for us to do with our capital.

And namely, I guess, the multifamily project loans, you're seeing much better levered returns there?

That's a very interesting market for us. Multifamily is a small niche agency market. It's probably had a $10 billion, $12 billion of origination over the last couple of years, and then last year it had over $20 billion of origination. I think there's going to be more bonds available for us in that market going forward. And I think the levered returns are just as good as there as you see anywhere else in the bond market.

And Matt, this program you're referring to, I'll have to look into it, but this is separate than the Freddie K series issues?

It's Ginnie Maes and the Freddie K series. We're talking about the IOs and there's some credit strips. There are a number of different things that we're adding to the portfolio. We've hired Ed Dangerfield, who I worked with back in the early 1990s. He's probably got about 26 years of experience, 27 years of experience trading in the product space. I think he's one of the, probably the most experienced people in the market. And he's going to take a year or so to build out a portfolio of this product for us. And he's already -- he's been here for a month and he's already started to add paper to our portfolio.

Well, great. Thank you, guys, for the color.

Douglas Harter, Credit Suisse.

Matt, can you talk about the agency portfolio? Is that something that at current size you'll likely keep around current sizes, or as source other investment opportunities, you'd use that as a source of funds?

Doug, it's a very tight market right now for all credit assets. The market is pricing almost everything to perfection in the credit space. And when we look out there, just take a look at junk bonds. Junk bonds are yielding probably 5.5%, 6% right now, the index -- even like Spain 10-year debt is at [2.50%]. There's not a lot of yield out in the marketplace. And so when you put that backdrop against agency mortgage-backed securities, when we bought the portfolio they were yielding around 3.25%.

That's a very attractive risk-adjusted return in this marketplace versus probably just about everything else out there. So I look at that. I think, that's probably the right place to put the capital at the moment to lever up the balance sheet. And yes, if we saw something better come along, if there was a dislocation in the marketplace, there was some volatility event. We have liquidity in these positions and we could definitely take it down to react to that marketplace.

Got it. And I think I know the answer to this based on the way you answered that, but is there anything else in the credit space, other than these project, these agency project loans, that you find interesting today or that you're looking at?

I'll let Mohit answer that one.

There are selected opportunities in the resi credit space that we've looked at and have added to the portfolio over the course of the first half of the year. As Matt alluded to in the client jumbo space, the sub-stack that we had retained by doing a securitization is yielding around 5%, but you have a [locked-out] bond with a lot of duration. We were able to source front-paid bonds with similar yield profiles, return profiles, so which we've added to the portfolio over the course of the first half of the year.

Yes. I think as some of the AAA bonds and some of the jumbo prime loan securitizations look kind of attractive. You've got to think they're probably trading around a 3.40%, 3.50% yield level. And the sub-stacks trading at 5%. I don't think I've ever seen a spread that narrow between the subs and the AAAs. So if I were going to buy anything there, I'd look at the AAAs on the jumbo deals.

Great. Thank you, guys.

This concludes our question-and-answer session. I'd like to turn the conference back over to Matthew Lambiase for any closing remarks.

Thank you everybody for joining us on the call today. We appreciate you joining us. And just like to say thank you to Rob Colligan and the team of accountants we have here. They worked very hard to get us current, and also to Ian [Why], they also worked very hard to get us current as well, and we appreciate that. And we look forward to speaking to you for the third-quarter earnings call. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.