Chimera Investment Corp (CIM) 2014 Q4 法說會逐字稿

Good morning, and welcome to the Chimera Investment Corporation Fourth Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Willa Sheridan. Please go ahead.

Good morning, and welcome to the Fourth 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 sections in our most recent annual and quarterly SEC filing. 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 filing.

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 Structuring. I will now turn the conference over to Matthew Lambiase.

Good morning, and welcome to Chimera's 2014 Fourth Quarter Earnings Call. I'll make a few brief comments regarding the activity in the quarter, and then I'll turn the call over to Rob Colligan to go over our financial results. Afterward we'll open the call up for questions.

I'd like to start off by saying that Chimera had a good fourth quarter. Both our mortgage credit portfolio and our agency mortgage-backed securities portfolio performed well, which resulted in higher core earnings for the period. The portfolio additions that we made in late 2014 are now being realized into earnings, and we're optimistic for our portfolio's potential in 2015.

In the fourth quarter we called the called the first of the seven Springleaf season sub-prime deals, and we securitized the underlying loans. The demand for the securitization was strong, and we were able to execute a $330-million deal and sell unrated senior bonds. Chimera retained the higher-yielding subordinate and interest-only bonds from that transaction. In my opinion, the bonds we retained have a better return profile than bonds available in the secondary market. Chimera has over $4 billion of similar deals to call and securitize. If the securitization market remains strong, this pipeline will help us create high-yielding assets for our portfolio over the next two years.

The overall credit performance on our legacy non-agency portfolio continues to be better than what we expected at the time of purchase. In the quarter we saw moderation in both the voluntary pre-payments and realized losses; and more importantly, the 60-plus-day delinquencies have been on a down trend for over the past year. These are all very good metrics, and if the trends continue, it bodes well for the future income on this portfolio.

Chimera's agency mortgage-backed security portfolio exhibited stable pre-payments quarter over quarter, which helped us maintain a healthy net interest margin of 210 basis points. In the quarter we executed a rebalancing of our agency portfolio by selling roughly 1 billion 30-year 4% coupons, and replacing them with 30-year 3.5% coupons, with the goal to increase duration in the portfolio. We also worked to extend our financing terms by adding longer-dated Repo trades. Our weighted average days increased to 94 days, up from 52 at the end of the third quarter.

Looking forward, I believe Chimera is well positioned. We have a high-yielding mortgage credit portfolio with improving credit metrics. We have a robust securitization pipeline, and we have a balance sheet that produces high income while operating at low leverage, giving us the flexibility to take advantage of opportunities when they arise. We like our position and our portfolio, and we are confident it will continue to produce durable relatively high income into 2015. Now with that, I'll turn it over to Rob Colligan.

Thanks, Matt, and good morning. 2014 was a good year for Chimera. Our economic return on equity was 26%, based on the increase in GAAP book value and dividends per share. Our return on investment was 21%, based on stock-price depreciation and dividends per share. GAAP net income for 2014 was $589 million, up from $363 million last year. GAAP net income for the fourth quarter was $6 million, down from last quarter as a result of hedge losses and impairments on a handful of securities during the quarter, compared to several non-recurring realized and unrealized gains recognized in the third quarter.

On a core basis, net income for 2014 was $402 million, or $0.39 per share, up from $350 million, or $0.35 per share, earned in 2013. Core net income for the quarter was $120 million, or $0.12 per share, up from $116 million, or $0.11 per share, earned in Q3. GAAP book value ended the year at $3.51 per share, up slightly from the third quarter, and up 8% this year.

In 2014 we added significantly to our agency and consolidated loan portfolios, which have lowered our spreads, but have increased Chimera's net interest income. The yield on average interest-earning assets was 6.9%, down from 8.8% last year. Our average cost of funds fell to 2.5%, from 3.5% in 2013. The net interest spread was 4.4%, down from 5.3% last year.

Importantly, net interest in terms of dollars earned continued to trend up throughout the year. Fourth quarter net interest income was $177 million, up 17% from Q3, and up over 65% from the fourth quarter of 2013. Our net interest return on equity was 14% for the year, up 12% from last year. Our return on average equity was 17%, up from 11% last year. The annualized dividends yield for Chimera was 11.3% based on our fourth-quarter dividend of $0.09. That concludes my remarks, and we'll now open the call for questions.

We will now begin the question-and-answer session.

(Operator Instructions)

Doug Harter, Credit Suisse.

Thanks, Matt. On the first securitization you've done with the Springleaf assets, can you talk about how the leverage and the rate on that compared to the temporary financing that you guys had in place, or the prior securitizations?

Sure. Mohit, why don't you take the question?

Sure. Good morning, Doug. Our first securitization of the call Springleaf transaction took place in November this year, the deal closed. Like Matt said, it was a $330-million transaction. We were able to place unrated senior bonds in a floating-rate structure. We sold them on a weighted average basis between the A1 and A2 traunches at LIBOR plus [2.25%] to [2.3%], is the execution. Now that versus where the original Springleaf transaction was quite -- I think the weighted average coupon on those viabilities was north of 5% effectively. It's much better financing, and better leverage in this new structure that we've created, given the demand for assets in a depraved-yield universe.

Can you just give us a sense, Mohit, as how much extra -- I guess the advance rate on the old versus here, to get a sense as to how much capital or equity you freed up?

Sure. If you look at where the A1 A2 is placed off the new deal, the SIM 14, SIM 1, the effective advance rate on the entire deal is about 84%, 85%. If you look at the performing assets, it's almost effectively 90% on a non-rated securitization. The Springleaf 11-1A deal, the advance rate was again to triple-A, so it was about 55% to 60% when it was issued back in 2011. If you looked at double-A and single-A, I think it got you to maybe 70%. We've been able to effectively get better advancement with a non-rated deal in 2014.

I think importantly there, too, is that the rate of return is -- we think it's pretty good on the--

On what we retained, the effective returns we're looking at is low double digits for the call date.

That's an important thing, too, is that when we re-securitized these deals, Doug, or securitized the deals, they have a -- there is a call in there, so another three years out we'll be able to call again and re-lever, if the market is advantageous to do it.

Got it. The operating expenses seem to be up pretty substantially this quarter. Was there anything related to this call that was in there? Anything standing out that is kind of non-recurring?

Yes, this is Rob Colligan. The main difference there also relates to Springleaf. Since we're consolidating that deal, we're also consolidating the expenses, so we have a fair amount of servicing in that. For the quarter, we had a little over $6 million of servicing-related expenses, which when you look at it quarter-over-quarter, we had a little over $2.5 million, so it's clearly trended up. But that $6 million-ish is a good run rate going forward.

Got it, so effectively the asset yield is -- reflects -- is higher, and reflects that expense?

That's exactly right, yes.

Okay, I appreciate that. Thank you.

Steve Delaney, JMP Securities.

Thank you. Good morning, everyone, and congratulations on a bounce-back year. Matt, I was wondering as far as we've got March coming up here in first-quarter dividend. In 2014 the Board pre-announced that they would pay a stable $0.09 dividend per quarter through 4Q of 2014. As we look out to 2015, do you think the board would take a similar forward-looking policy, or would be back to more of a quarter-by-quarter look at the dividend? Thanks.

Thanks, Steve. I believe the Board actually likes setting a dividend for a period of time and having stability in the pay rate of the Company. I think that they will most likely, when they meet for the next dividend, consider that. We'll see. That's -- we'll know more by the middle of March.

Couple weeks, yes. Okay, great. Could you comment generally as far as looking out this year the investment landscape? I'm curious if you see any additional types of credit investments. The Springleaf trade looks like a home run, and it's great you've got that on the books. But I'm sure you're always looking at the market for where the next dollar of capital can be deployed, maybe shifted out of the agency allocation.

Specifically in that context, I noticed last week on the [ANALI] call that David Finkelstein mentioned that ANALI itself had actually invested in some GSE risk-sharing bonds in the first quarter. I was curious specifically, if Chimera also participated in that same trade? Thanks.

Sure. Well, I would say that is the operative thing for us going forward in 2015. I think ideally we would like to take down our agency positions and invest more in credit. I think we're seeing a lot more availability in financing terms for longer repos on non-agency credit. This seems to be cheaper and more capital available for us for financing there, which is helpful. I think that's the trade that we're going to try to execute over the next couple of quarters, is to take down the agency book and invest more into credit.

I'll let Mo speak to some of the opportunities he's seeing in the mortgage credit space.

Sure, Steve. Good morning. As far as opportunities in resi credit, we've discussed loans that we've looked at in the past. The prime jumbo isn't necessarily a good fit for us at the moment, but the RPL space we've actively looked at.

We've made some investments on the security side in Q4. We're looking at loan packages to do our own deals off of in 2015. As that market's picked up, I think there's definitely opportunities there.

As far as the risk transfer deals go, we didn't participate in the [CAS-Dacker] deals, but we did participate as far as JPMorgan, Madison Avenue deal, which is a structure to the agency deals. We feel that structure has a lot more up side in terms of credit versus the CAS-Dacker option. If those deals continue to come to the market place, we will definitely invest in those.

And the JPMorgan deal, that was actually true first loss up to 1%, was it not?

That's correct.

Yes, okay. Very good. Okay, guys, well listen, thanks for the comments, and nice to see everything on track the way it is. Appreciate it.

Thank you.

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

I'd like to thank all of you for participating in our fourth-quarter 2014 earnings call, and I look forward to speaking to you for the first quarter of 2015. Thank you very much.

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