Chimera Investment Corp (CIM) 2015 Q1 法說會逐字稿

Good morning, and welcome to the Chimera Investment Corporation first-quarter 2015 earnings conference call.

(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 first-quarter 2015 earnings call for Chimera Investment Corporation. Any forward-looking statements made during today's call are subject to risks and uncertainties, which 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 these forward-looking statements 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.

Thank you, Willa. Good morning, and welcome to the first-quarter earnings call for Chimera Investment Corp. I will make a few comments, and then I'll turn the call over to Rob Colligan, our CFO, to discuss the Company's financial results, and afterwards we will open up the call to questions.

On March 17, Chimera's Board of Directors declared a 1 for 5 reverse stock split, and declared a $0.48 per share dividend, which was a 6.7% increase over the prior period. They also gave guidance that we will pay dividends of $0.48 per share for each quarter for the remainder of 2015. Chimera had solid first-quarter core earnings of the $0.59 per share, and our taxable income in the period covered our dividend payout. At the end of the quarter, the Company operated at a recourse leverage ratio of 2.6 to 1, and produced a dividend yield of over 12%. It was a busy quarter for our portfolio.

We reduced our agency mortgage-backed securities, we added to our non-agency mortgage credit funds, and just subsequent to quarter end, we settled on a pool of seasoned loans and executed a securitization. Our net exposure in our agency portfolio was down roughly $1.3 billion in the quarter. We took the opportunity to sell $1.5 billion of our 30-year agency mortgage backed securities, while we added $165 million of agency commercial mortgage backed securities. Agency commercial mortgage backed securities have superior call protection, which makes their cash flows more predictable and easier to hedge. We plan on adding more agency commercial bonds to our portfolio, although this market is smaller, and it takes more time to aggregate a meaningful position compared to 30-year mortgage backed securities.

In our non-agency mortgage backed securities portfolio, we executed over $150 million of re-REMIC securitizations, in which we retained over $90 million of either senior or subordinate bonds in those deals. We added over $85 million in market value of non-agency IO and inverse IO in the quarter. We continued to find interesting investment opportunities in non-agency bonds, and perhaps more importantly, we are seeing increasing availability of longer-term repo funding for these assets. In the quarter, we executed $100 million one-year term non-agency repo, with an evergreen feature.

In early April, we securitized the pool of $268 million of seasoned performing loans, residential loans. The loans have over 15 years of seasoning and good pay histories. Chimera retained approximately $63 million of subordinate bonds, and an interest-only strip in the deal.

Additionally in the quarter, Chimera set up its own securitization shelf and depositor, which will allow us to be more efficient when we create securitizations in the future. CIM Trust is the name of our shelf, and there are two deals listed on Bloomberg: CIM 2015-1EC, and CIM 2015-2AG. EC reflects Equicredit-originated collateral in the first deal, and AG reflects American General originations from our previously-announced Springleaf securitization program. We expect our future deals to be securitized on the CIM shelf going forward.

In our quarterly supplement on page 2, there is a snapshot of the composition of Chimera's $3.5 billion of capital. We have $2.6 billion of our capital allocated toward the credit portfolio, and $900 million allocated toward our agency portfolio. Chimera has $8.8 billion of credit assets, of which $4.9 billion are financed with non-recourse securitizations, and $1.3 billion is financed with recourse leverage repo borrowings.

We have been increasing our recourse repo borrowings on our credit portfolio, as longer dated term repo have become available to us. Our agency portfolio decreased in the quarter, and if conditions remain favorable in 2015, I would expect to see a continuation of the rotation away from agency mortgage-backed securities, and an increase in our mortgage credit portfolio.

We continue to have a constructive view on residential mortgage credit. Mortgage delinquencies have fallen to the lowest levels in eight years. Home prices have recovered in most parts of the country, and borrowers have been building back their equity.

We're seeing the credit quality of older mortgage securitizations get better, as the backlog of foreclosed homes gets sold and flushed out of the deals. Loss severities have also been trending lower on foreclosure sales. Pre-payments remain depressed on older securitizations, as mortgage credit remains tight for anyone except for the highest credit quality borrowers. So stable prepayments and improving credit fundamentals help make non-agency securities some of the most attractive investments in the fixed income market, and when coupled with longer-term repo financing, they have one of the most compelling leverage yield profiles available.

Chimera remains well-positioned. We're producing high dividends, while operating at a low 2.6 to 1 recourse leverage ratio. Low leverage helps us maintain flexibility and take advantage of opportunities as they arise in the market, and improving fundamentals in mortgage credit will continue to allow us Chimera to pay a durable high dividend in the quarters ahead. And with that, I'll turn it over to Rob.

Thanks, Matt, and good morning. We had two accounting changes for the quarter that I will highlight. We announced the 1 for 5 reverse stock split, which is reflected in the 10-Q on a retroactive basis, to ensure all reporting periods are comparable. All future reports will reflect this change.

Also as of January 1, 2015, the Company adopted ASU 2014-13, and elected the fair value option for all securitized loans held for investment. The fair value option allows both the loans and related financing to be consistently reported at fair value. We expect fair value changes of the loans and related financing to be more closely correlated going forward, which will simplify and improve the transparency of the financial statements. The implementation of the new accounting guidance created a one-time implementation loss of $12 million, which reduced our GAAP book value.

I will now review selected financial highlights for the quarter. Our economic return on equity for the quarter was 2%, based on a decrease in economic book value, offset by dividends per share, which we increased this quarter. Our return on investment for the quarter was 2%, based on the change in stock price and dividends per share.

GAAP net income for the first quarter was $67 million, up from $6 million last quarter, but down from $100 million from the first quarter of 2014. On a core basis, net income for the first quarter was $120 million or $0.59 per share, in line with the fourth quarter of 2014, and up from $83 million or $0.40 per share earned in the first quarter of 2014.

GAAP book value ended the quarter at $17.14 per share, down from the fourth quarter, but up 5% from last year. The yield on average interest-earning assets was 6.4%, down from 6.9% at year end, and our average cost of funds was 2.3%, down from 2.5% at year end. The net interest spread was 4%, down from 4.4% at year end.

Although gross and net spreads are down, net interest in terms of dollars earned continues to trend up, as we reinvest for the future. First quarter net interest income was $183 million, up 3% from year-end, and up over 85% from the first quarter of 2014. Our net interest return on equity was 17% for the quarter, up from 16% last quarter, and 11% last year.

Our return on average equity was 8%, up from 1% last quarter, but down from 12% last year. The annualized dividend yield for Chimera was 12.2%, based on the first quarter dividend of $0.48. That concludes our remarks, and we will now open the call for questions.

(Operator Instructions)

Our first question is from Doug Harter of Credit Suisse. Please go ahead.

Thanks. Matt, I was hoping you could talk about the economics of collapsing the Springleaf loans, and how that might have progressed since you acquired those assets?

Sure. Actually, I'll turn the call over to Mohit, and he'll go through that.

Good morning, Doug. We've obviously, as we stated on the Q4 call, collapsed the first deal in Q4 of last year. We were in the midst of collapsing the second deal post quarter end. And the economics -- the performance of the collateral has been better than expected since we acquired the portfolio in August of 2014, and the advance rate that we are getting for our non-rated securitization, as I mentioned on the last earnings call, has also improved.

The deal that we are working on for Q2 will have an effective advance rate of 85% on the entire deal, and 90% on the performing balance. And the financing rate that we're getting is about 100 basis points better than what the old deal had. We've gotten more equity in the deal, and it's increasing the returns on the retained pieces to the north of 500 to 600 basis points.

So, how will we see those better economics? Will that show up as a gain? Or will that show up through a wider yield that will be reflected over the life?

It will be a wider yield reflected over time, and it also frees up cash to reinvest, given that we have more leverage in the structure to reinvest in other assets.

Doug, this is Rob Colligan. You will see our cost of funds going down, as each one of those deals gets refinanced.

Got it. And, Mohit, if you could just remind us what the pacing is -- if you have a deal that can be refinanced in the second quarter -- after that, what should the time frame be to expect future deals?

Yes, we have three deals that will be for 2015, and three deals in 2016. The first deal for 2015 is happening in April. The next deal would be in July, and the third deal would be in October. So, we have one in the third quarter, one in the fourth quarter.

Great. Thank you.

You're welcome.

Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Lambiase for any closing remarks.

Thank you very much for joining us today on the first-quarter earnings call, and we look forward to speaking to you at the next earnings call.

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