Chimera Investment Corp (CIM) 2015 Q2 法說會逐字稿

Good morning, and welcome to the second quarter 2015 earnings call for Chimera Investment Corporation. (Operator Instructions) Please note, this event is being recorded

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 statements 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.

I would now like to turn the conference over to President and Chief Executive Officer, Matthew Lambiase. Please go ahead, sir.

Thank you, Chad. Good morning, and welcome to the second quarter 2015 Chimera Investment Corporation earnings call, Joining me on the call this morning is Choudhary Yarlagadda, our Chief Operating Officer, Rob Colligan, our Chief Financial Officer; Mohit Marria, our Chief Investment Officer, and Bill Dyer, our Head of Credit.

On today's call, I will go over the recent events that we announced in our press release last night, Mohit will address our portfolio activity in the quarter. Then Rob will review the financial results. Afterward, we will open up the call for questions.

Last night, we issued a joint press release with Annaly Capital, announcing that Annaly and the independent members of the Chimera Board agreed to internalize the Company's management function. Fixed Income Discount Advisory Company, or FIDAC, a wholly owned subsidiary of Annaly, had been Chimera's external manager. Under the terms of the agreement, FIDAC will continue to provide Chimera with infrastructure and personnel assistance while Chimera transitions fully to its independent system.

We believe that internalization is an important next step for Chimera's development and will allow us to realize cost efficiencies and more closely align management's interests with those of our shareholders. The internalization also ensures the continuity of Chimera's management team. In addition, we have further strengthened the team. Choudhary Yarlagadda, formerly our Head of Structured Products, has been elevated to Chief Operating Officer, and Phillip Kardis, a partner at K&L Gates and the Company's external counsel since inception will become our new General Counsel. All employees of Annaly that focus on Chimera's business will become employees of Chimera in the transition.

We also announced last night that Chimera's Board of Directors has authorized a $250 million share repurchase program. Under this program, we will buy back Annaly's 4.4% stake in the Company, which amounts to roughly $126 million worth of shares. Other share repurchases under the program will occur from time to time depending on market conditions. Both the Board and management believe that Chimera's shares at a meaningful discount to book value, when the share price does not reflect the Company's intrinsic value created long-term value for our shareholders.

Speaking for myself and the other employee's at Chimera, I can say we're all very excited for our new opportunity. It has been great to work at Annaly and be part of the successful company that Mike Farrell and Wellington Denahan founded back in 1997. However, after listening to our shareholders and recognizing that markets and business models must change over time to ensure continued success, we believe it's for both company's best interests to operate independently of each other. Both Wellington Denahan and Kevin Keyes, the incoming CEO of Annaly have made great contributions through this transition and we appreciate their efforts to make the internalization process as seamless as possible. Their support will allow us to be fully staffed and operational as an independent company by the end of this year.

Chimera has a proven business model, strong portfolio, and it's well positioned for future growth. Our large portfolio of mortgage credit assets are high yielding, performing well, and would be difficult to acquire in today's market. Importantly, our unique portfolio offers an attractive risk-reward profile. We are able to produce a very high level of income for our shareholders while operating at low leverage. We continue to take steps to further improve our risk-reward profile. The Company has worked hard over the first two quarters of 2015 to reduce our interest rate exposure, in order to dampen the volatility of our book value while continuing to produce robust earnings.

We have reduced our agency portfolio by $2.5 billion since the beginning of the year and we believe we are well positioned for possible volatility in the bond market should the Federal Reserve increase short-term rates in the near future. We believe a more cautious approach towards leverage is a more appropriate position to adopt in today's market until we have more clarity on the actions of the Fed and the direction of the market.

We maintain a lower leverage ratio so we are well positioned to add to our portfolio should opportunities present themselves and conversely, if the market remains calm after a Fed move, we continue to have the ability to actively pursue opportunities to relever our portfolio.

In our opinion, residential mortgage credit provides some of the best risk adjusted levered returns in the fixed income market. We have significant exposure to the sector and we continue to add these assets to our portfolio.

Improving credit fundamentals and increasing liquidity in the non-agency market coupled with more financing avenues make investing in this asset class very attractive relative to other mortgage assets. As the government pulls back from its sponsorship of the residential mortgage market, it's clear to us that there's a significant opportunity for private capital and that Chimera has the expertise and the capital to be a key player. We've been able to develop and manage a portfolio of mortgage credit assets that has produced a high and durable dividend for our shareholders. As an independent company with a strong portfolio and attractive growth opportunities ahead of us, we are confident that we will continue to acquire assets and produce high relative returns for our shareholders in the coming quarters.

Now, I'd like to turn the call over to Mohit Marria to discuss the portfolio activity in the quarter.

Thanks, Matt and good morning everyone. I will quickly go over the investment activity for the quarter and turn the call over to Rob. As Matt alluded to, Chimera continues to identify and acquire attractive credit sensitive residential mortgage assets without significantly increasing our overall interest rate exposure. In the second quarter, we added over $300 million in new non-agency investments as well as pricing two securitizations. Early in the quarter, we priced a $268 million (inaudible) credit originated season subprime deal as previously announced. The collateral backing this deal is over 181 [season] with a weighted average interest rate of 8%. We were able to sell 215 million senior notes with an interest rate of 1.93%. Chimera retained $53 million in subordinate notes, including the (inaudible) deal, which we anticipate will produce a 12% to 13% ROE.

In addition, at the end of April we were able to successfully call and restructure the second of our seven [Spring Leaf] transactions. Recall that in late 2014, Chimera consolidated approximately 4.5 billion of seasoned subprime loans once owned by Spring Leaf Financial when we purchased the subordinate interest on seven previously issued subprime securitizations. The subordinate interest that we purchased have the rights to call this outstanding debt on the third anniversary of their issue dates. Because the loans are consolidated on our balance sheet, there is no gain or loss on the call and reissuing of new debt.

To date, we have been able to lower our interest rate costs and reduce our equity commitment to the portfolio when we called and reissued the debt in the new deal. In April, we exercised the call on a $330 million Spring Leaf deal that had 280 million senior bonds outstanding pending an interest rate of 4.51%. Chimera had $122 million equity position in the deal. The new deal priced in April, we were able to sell $276 million of senior bonds with an average interest rate of 3.49%, and Chimera's new equity position retained in the deal was reduced to $53 million.

We were able to sell more senior bonds at a lower interest rate, increasing our advance rate to 84% from 63% on the previous deal. The economics of refinancing these deals has been attractive and we have a pipeline of deals to refinance through 2017. While we have been reducing our 30-year MBS agency portfolio, we added to our agency CMBS position by $270 million over the quarter. These assets offer a (inaudible) profile because of the prepayment lockout versus agency MBS. We may increase the agency CMBS portfolio with a pay down from the MBS portfolio over time.

Our credit sensitive mortgage portfolio continues to exhibit positive overall performance with both delinquencies and severities trending down. Stable prepayments and improving credit fundamentals help make the non-agency securities some of the most attractive investments in the fixed income market.

With that, I'll turn the call over to Rob who will discuss our financial results for the quarter.

Thanks, Mohit. I'll now selected financial highlights for the second quarter. Our economic return on equity for the quarter was 25 based on our dividends and a small decrease in economic book value. GAAP net income for the second quarter was $116 million, up from $67 million last quarter and $105 million for the second quarter of 2014. On a core basis, net income for the second quarter was $109 million or $0.53 per share, down from $120 million or $0.59 per share last quarter, and up from $83 million or $0.41 per share in the second quarter of 2014.

GAAP book value ended the quarter at $16.73 per share, down 2% from the first quarter and essentially flat compared to the second quarter of 2014. The yields on average interest-earning assets was 6.1%, down from 6.4% last quarter, and our average cost of funds was 2.5%, up slightly from 2.3% last quarter. The net interest spread was 3.6%, down from 4% last quarter. Second quarter economic interest income was $142 million, down from $167 million last quarter and up from $102 million in the second quarter of 2014. The reduction of interest income and spread was primarily driven by a smaller agency portfolio, as well as faster prepayment speeds.

Our net interest return on equity was 15% for the quarter, down from 17% last quarter, and up from 12% last year. Our return on average equity was 13% this quarter, up from 8% last quarter and 12% last year. The annualized dividend yield for Chimera was 14%, based on a second quarter dividend of $0.48.

Regarding our current expense base and the internalization, we modeled our previous costs on an externally managed basis to an internally managed model and believe there will be cost savings. As we are fully transitioned, we expect our G&A expenses to be at the low end of the range for the peer group.

Regarding the stock buyback, we believe buying back stock when it's yielding 14% is a very good use of capital. We believe that at the end, we will have the highest yield, lowest leverage, and lowest expense ratio in the peer group.

That concludes our remarks and we'll now open the call for questions.

(Operator Instructions) Our first question comes today from Douglas Harter with Credit Suisse.

Thanks. I was wondering if you could talk about now being separated from Annaly, if you think that will impact your access to kind of deal flow and seeing opportunities like the Spring Leaf portfolio that you acquired.

Actually, no. I think we've been operating as a separate pool of capital and I think the market participants, the people who know us know that while we are managed or managed externally by a subsidiary, Annaly Capital Management, I don't believe anybody showed us anything because we were part of the complex here.

I think we are pretty well known at people on the Street. I think people know that Chimera has the expertise and the ability to turn around very quickly when they're shown deals, and I don't think any of that changes.

Great. Thanks, Matt. And then just to clarify on the buyback of the Annaly stake, what time period does that buyback happen?

It'll happen this month.

The entirety of that?

Yes.

Great. Thank you.

Yes, the pricing shares were agreed. So it's done.

Okay, perfect.

The next question comes from Lee Cooperman with Omega Advisors.

Yes, thank you. I apologize if you addressed this because I missed part of the call, but several questions. Obviously, you went through pro forma before you entered into this transaction. I was wondering if you could share with us the accretion that occurs as a result of doing this transaction. Because I assume that Annaly made a profit on it and we're not going to incur the -- we're going to say with Annaly we're not going to spend to create the same services.

Secondly, a little different question. What is the timetable to complete the $250 million buyback? In other words, Annaly sold their stock but basically are we going to enter the market right away or are we going to stretch this out over a prolonged period of time? Third, what impact will this transaction have on your dividend? I'm kind of surprised the stock dropped on this, so clearly people are going to look at the dividend as the principal source of return here. So what is the impact going to be on the dividend as best as you can tell and the impact, obviously, on recurring earnings? Any help you could be would be appreciated.

Sure, we'll take those in order. If I miss anything, feel free to remind me. So based on the pro forma on the cost, obviously we feel we were paying 120 basis points or approximately $42 million a year. We think we can do it at a lower cost on an internal basis. We haven't put out and we probably won't put out for a while what the exact cost will be on a pro forma basis. We'll have a transition period over the next four to five months and expect to be running fully independent through the early part of next year. But obviously, the models that we put together were strong enough and compelling enough to feel like there were adequate cost (inaudible) --

Why don't you share that with us now? I mean it's an open mic. Everybody's listening. What's the approximate savings?

By the time we're done, I think we'll be very similar to those that are externally managed and probably at the lower end of that range.

What does that mean? What is the dollar amount you think it will cost you to replace what Annaly did for $42 million? Is it $20 million, $15 million, $10 million? Is that will accrete to the distribution. It's a very critical question.

It's just not a number that we have decided to publicly disclose at this point. There are a number of --

Let me explain to you why you should disclose it, not to be argumentative, but you're buying back stock, okay. In a sense, you're trading against your shareholders. So you should, as a manager, want your shareholders to have as much information as humanly possible before you buy back the stock from them. So like Warren Buffet who was a good exemplar for all of us, he says I'm not buying back Berkshire Hathaway stock unless it's below 110% of book value, unless my cash position is above Y, and that this represents the best use of capital. So he wants to share with his investors all the information so they have whatever they could have to make an intelligent decision whether they want to sell back to the company or whatever.

So I'm trying to figure out is this thing $25 million accretive, $20 million accretive so I can divide by the number of shares outstanding and determine what should happen, all things being equal, to your $0.48 dividend.

Sure. We haven't disclosed an exact number at this point and I think we'll just move on to the next question on your buyback plan. Obviously, we have completed the buyback from Annaly of their 4.4% stake. It's roughly 9 million shares. That will close in the month of August. We'll look, as you will, I'm sure, the stock performance and while it's yielding 14% we may be a little bit more active. If it trades up and starts yielding a little bit less, we'll probably put plans on hold but that's going to be over time. We haven't set an exact calendar or timeframe for buying back shares. But I think it's very shareholder friendly to announce a plan of that size and to execute in large scale upfront.

Going through the dividend, obviously earning $0.53 on (inaudible) and paying $0.48, we feel like the dividend is well covered. We'll see how we're going for the rest of the year and we'll update forecasts towards the end of the year. But we've already announced $0.48 for the remaining two quarters of the year and feel very confident about that. So we'll see how things go. Obviously, you're right, to the extent their expense base is lower, we'll have more income to distribute. It's just not a number that we want to disclose at this point.

Let me just go on record saying I think your financial relations policies are wrong.

Okay. Thanks, Lee.

Our next question comes from Mike [Whitener] with KBW.

Thanks, I think he actually I think drilled some of the points that I was going to hit on. Let me ask you a different one. FHLB, now that you're independent from Annaly, Annaly had FHLB membership. Is that something you guys think about?

Yes, it is and we've had discussions with several of the regional banks and there's high probability that that will be in our future.

Any sense of timing? I mean there's been a lot this year, I think more half the group is now members. Is it next couple quarters or --

It's not something that we have disclosed on but I would say that we're in active discussion.

Okay, great. I guess my only other question, results look pretty good relative to what your dividend is. But trying to work through the model, I see a little handicap because there's no balance sheet in the press release and normally you guys release the Q. Last quarter at least, it was the same day. We haven't seen that yet. So I guess any thoughts on the timing of seeing a 10-Q or -- and related to that, why not give us a press release balance sheet?

No, you're right. It's the first time that we haven't put out the earnings release on the Q at the same time. I think in future quarters, we may have a more fulsome release if there is a delay in between the two. The Q will either come out Friday or Monday.

Okay, and is the reason -- is the delay related to kind of the obvious stuff that's been going on? Or is there some other reason for the --

No, no there's no other reason. It's just obviously you look at the 8-K, that came out yesterday. It was 150 pages and a lot of effort went into everything that went into that. And we're taking a little bit of extra time just making our last few reviews of the Q before it's issued.

Yes, makes sense. And I said I wasn't going to follow-up on Lee's question but let me ask you, in the very near term like the next quarter or two, is it possible we might see total expenses associated with hiring and bringing new people on, and getting your own accountants and all that sort of stuff? Might we see expenses a little higher before we see them lower?

Again, it's not something we've disclosed. Obviously, there will be some transition costs. Essentially, all of the management team's contracts are public and there are equity vests in there that will -- some of the compensation will come over time. There are a number of moving pieces when you get into forecasting expenses and we prefer to let the dust settle a little bit before we're prescriptive with the expense numbers.

All right, well I appreciate it and thanks for the comments, and congrats on autonomy.

The next question comes from Joel Houck with Wells Fargo.

Thanks and good morning, guys. So on the -- when you deconsolidate the trust, you gave us the new advance rates. I'm wondering what the difference in the financing rate is when you deconsolidate the trust, what the different -- the delta is.

Sure. As I mentioned on the call, our advance -- or the interest rate on the original securitization was [4 spot 5.1]. On the new one, it's [3 spot 4.9]. So it's about 100 basis points of savings along with lower equity position.

Okay, good. Now, on the income statement, the G&A expenses were up almost threefold from a year ago and the first six months are almost up threefold versus the six months of last year. Can you give us a little more color on what's -- it's a pretty big magnitude, especially given that you're still externally managed as of June 30.

Sure, the biggest increase, especially if you're comparing the first half of last year to the first half of this year are the servicing expenses related to Spring Leaf, which was acquired in August of last year. So that's the biggest piece. That's probably a $5 million to $6 million a quarter run rate that didn't exist in the first half of 2014.

The other piece, as we've --

And that's because the loans are consolidated on our balance sheet, right, and we're paying the servicing costs.

As far as the other expenses, we did two securitizations during the quarter and there are some transaction costs related to those. I think what you'll see in quarter is that we are working on securitizations. We'll have another this quarter, July, with another one of the Spring Leaf deals. The cost may trend up a little bit. So those are the two big drivers. Again, if you're going last year to this year, it's servicing and then as we have more securitizations in the quarter, you'll see a slight uptick.

Okay, so roughly $6 million run rate for Spring Leaf. That accounts for half the increase and you're saying the rest of the majority is the increased securitization expenses.

Yes, I would say for each securitization it could be $1 million to $2 million depending on -- every deal is a little bit different but each one could be $1 million to $2 million uptick in expenses.

Okay, and so then on the management fee line you have an expense recovery from the manager. Can you talk about the mechanics? I know those are going away and being replaced by operating expenses. I'm just getting a sense, I mean the net management fees were only $5.5 million in the quarter and only $15 million for the first six months of this year. So what is -- I guess the question is, what is being replaced? The right way to think about this is the net going away and what we have to compare coming in is all the expenses and salaries of all the employees.

Can you tell us how many -- well, I guess the first question is what exactly is going away? How many employees are coming into Chimera?

Sure, I think the best way to look at it is we're replacing the gross expense. What's really happening with that reimbursement from the manager, those are all costs related to the restatement and related investigations and other things afterwards that buy backs have agreed to pay. So if you were modeling out, I'd really take the reimbursement and net that against G&A and look at that on a pure basis because that's more of an apples comparison.

What we're replacing is the -- on an annual basis roughly $42 million of management fee with employee base that will be approximately 25 day one growing to somewhere between 35 and 40 over probably the next six to nine months. We have all key hires in place as well as number of people who are moving over day one, 25 people. And we'll have another 10 to 12 or so over the next six to nine months.

And those 10 to 12, is that for growth or is there some mechanical delay in the rest of those people coming over?

No, some of them are just -- there are a number of people and folks on the Annaly side were actually very helpful in helping us transition some people. There are just a few holes and more support staff. Obviously, we -- I mean we could explain Chimera and their operations like an hourglass. You have a full investment team at the top. In the middle, we were sharing things like HR, IT, compliance and then we fanned back out and had a full finance, accounting, and reporting team. So it's the pieces in the middle where we need the staff over the next six months or so. Probably the biggest area is technology.

Okay, so the 25 people are roughly senior management and investment professionals and the extra are more accounting IT that come in over time. Is that more or less the thing --

Yes.

Okay.

Yes, support staff.

Okay. And then lastly, Matt, the -- how should investors think about your agency strategy? I think right or wrong, I think a lot of investors look at Chimera at least as a bull case more than a credit side, obviously, of a big agency book and that's been winding down kind of consistent with what we've seen with your peers. Will that continue to happen? How -- who actually is kind of responsible at Chimera for the agency strategy going forward and how is that function, if at all, separate from when you were kind of externally managed?

It was always a separate function from Annaly. So we've always managed our agency position separate from Annaly Capital's portfolio managers. So it's -- there will be no change in the personnel there. I think we started the year with roughly -- or ended last year with roughly $7.5 billion worth of agencies on our balance sheet and now that we've taken that position down significantly. And I think the proof in the pudding is that the tangible -- the economic book value of the Company went down 1% in the quarter, which I think is a good result and it shows that we're managing down the interest rate exposure in the Company. Because a high degree of probability now in the near term that the Fed is going to do something with interest rates. And being an actively managed portfolio, it makes sense for us to take some of that, tap the brakes a little bit and take some of the risk off the table and be conservative.

And I think we're at a good spot right now with the agency portfolio. I don't see it decreasing any more than it -- we took it down already this year. And I think we're at a place where we can earn our very high income and we can do it, I think, in as safely a fashion as you can. You've always got to take some risk in the bond markets. We do that but we've been actively trying to mitigate the interest rate risk here as we operating into the uncharted waters of the Federal Reserve potentially raising rates. They've been at zero for such a long time that it's very hard for me as a manager or anybody here on the investment team to say, we know exactly what's going to happen when they do start raising interest rates. And I think the best way to deal with that is to take down the leverage here, and wait and see what's going to happen.

And that's what we've done, and we feel good about the portfolio, feel good about the way the Company is positioned. I mean if you think about it, we're producing quite a bit of income and we had very low volatility in our book value in a very, very difficult quarter for most people in the space.

No, I think you guys have done a terrific job, especially compared to your peers and I think from a strategy perspective, you've been very transparent. I think the one thing I would add and I think you got the gist of it from previous callers is just any -- as soon as you can provide clarity on the expense savings, the differential, I think it would be helpful. I think it is important. I think you guys get that. So again, congratulations on the autonomy and look forward to following you as an independent company.

Our next question comes from Brock Vandervliet with Nomura.

Thanks for taking my question. First off, is there anything new to report in terms of the regulatory issues around material weakness disclosures in the past? Has there been progress there? Are you running their new system in parallel?

Yes, we actually disclosed -- well, actually we will disclose in our quarter that our camera system has gone live and we used it for the first time this quarter. So between that system going live and enhanced controls, both executed and designed, we feel like the weakness will be remediated in 2015.

Okay, great. And separately, if you could just kind of help us with discussion more of the yields in the portfolio and clearly, this quarter we saw a step down and it was -- I get the sale of the agencies and it looked like you peeled off some of the higher coupon paper there. But it's more than just that portfolio. Is this -- so could you give us some more color there and talk to that? Thanks.

Yes, sure. I think one of the biggest pieces and a lot of folks in the space have the same issue and story is the fees were a lot higher than we have seen last year. And so our amortization on the agency book is clearly up. It's (inaudible) the gross and net yields on the agency book down. Mo can give a little bit more color on current [speeds] and maybe where he sees some things coming in. But the second quarter is the highest point that we've seen in recent history on premium amortization.

Yes, Brock, quickly, I mean you can see that we've shifted our agency book down from 4 to 3.5 that you alluded to. We had a pretty big tick up in prepayments on [4s] which are the yield that we earned on our agency portfolio. But on the non-agency portfolio side, the portfolio is yielding pretty healthy. So we're 17% levered and each purchase that we're making to that portfolio obviously is not at the same yield. So we did have $300 million of new investments in the non-agency space, anywhere ranging from 5% to 6.5%. And again, on a levered basis that will produce mid-teen returns. But just on an unlevered basis, the yield will come down just as we acquire new assets at lower yields.

And I think the unfortunate thing maybe for the Company is our yields historically have been very, very high and they're coming down a little bit. When you look at a lot of the similar competitors in the same space, their gross yields are in the 4 range whereas we're in the 6 range. So we still feel pretty good that we can earn the same level of earnings at two turns of leverage, where they're typically at 3 plus with a 4 gross yield, whereas we're at 6. So again, I think we feel pretty good about where we're positioned.

Okay, and just as a follow-up, is there anything that you can offer in terms of how the pipeline looks, specifically around the Re-REMIC transactions? I know those are large and extremely lumpy, but do you have any kind of telescope on a look ahead for us?

As it relates to the Spring Leaf transactions? Or as it relates to our other consolidated Re-REMICs we've done? The Spring Leaf transactions are pretty well timelined, as I mentioned. Each one is callable on their third anniversary date. We've done two so far and we've done a third one in July. The next one will be in October and then three in 2017.

Yes, I've seen that disclosure. I was more asking about any new deals that you may see out there.

We're always being shown season loan packages, [R-Field] packages. Again, it's just going to come down to the economics and whether they work. There's no timeline as to when we will have the securitization. We had two in Q2. We already have one in Q3 and again, if there's other loan packages and/or opportunities that look attractive, we will definitely lever those up via securitization. Nothing definitive to report on the call.

Okay. Thank you.

(Operator Instructions) The next question comes from Steve DeLaney with JMP.

Hey, good morning everyone. Exciting news last night and I know, Matt, it's been a long grind over the last three years for you and the team to kind of get to the position where you could do this, and happy to see that work out for you. Actually, and Rob, you'll be relieved. My question that I had prepared was about expenses but I think we've covered that pretty thoroughly so I'll move past that to my second.

So guys, in the past in terms of your credit strategy, which is where I think -- I agree with Joel, I mean when everybody thinks about Chimera, we think primarily about credit as the opportunity. You certainly put yourself there with Spring Leaf. But in our past conversations, I bring up sometimes new credit versus legacy credit and I bring that up because at some point, I think all resi credit investors will have to address that. It's certainly not a near term for you, but I'm just curious as you're building this new platform. So you guys now have an open playing field so to speak. Looking forward in terms of whether we look at it as far as conduits, or operating companies. How do you sort of see new originations and creating your own credit investments? How does that fit into your future and possibly even servicing and MSRs as well? Thanks.

Thank you, Steve. We are certainly looking at new originations. We price collateral and we look at deals all the time, and new originated collateral and we talk to mortgage banks and people who originate the loans. The problem right now with prime jumbo, frankly, is that it -- the banks have a better bid in the marketplace than the securitization exit for us. So the problem is if you go out and you build a franchise to do that, which we could do and we probably will do at some point in the future.

But right now, today, to put the capital out to do that, to hire the bodies that you need to build out the infrastructure, to do a business that's marginal at best and has a lot of risk in terms of pipeline risks, and hedging risks, and execution risks of the securitization, the economics just don't pan out for the way we look at the risk reward profile.

So as we think about that in the future, the economics are going to have to change in order for us to get comfortable with that. I know there are people out there that are doing that business but I think if -- you really have to be conscious that if rates do rise, I think a lot of the prime jumbo stuff that's coming through these pipelines refinance business. And if rates do rise, I think that gets turned off as well. So I think you'd be really under some volume pressures there too.

So there's a lot of risks right now for just to spend the money on -- to build out the infrastructure to do that business. That's not to say that we're not looking at non QM. It's not like we're saying we're not looking at other types of originated loans, but again that's something that we're going to be have to work out with the rating agencies and the other participants in the market, to see if we can get people to buy the securities off of those type of lending programs.

And it's slow going right now. There's just not a lot of follow through with the investors to do things that are not outside of the box.

Understood. Appreciate you sharing the forward view and I agree, it's not a layup at this point in time, in terms of the market opportunity. So getting back to the question, I think Joel asked this too, reducing agency exposure and obviously, it's not a question so much of your book value this quarter, but just how you kind of brand yourself. I'm just curious since whole loans, obviously, do provide -- help you with your 40 act exemption, the same way whole pools, just curious what your view is on the MPL, RPL pools? A lot of people think that that supply is really going to pick up over the next couple of years.

I think it will. We have been participating in the seniors, potentially -- Mo can speak about it, but in some RPL pools and buying the senior bonds off of those transactions. I think they are attractive and I think there will be a lot of supply in that. And I think the levered returns are pretty attractive. Mo, you want to --

Sure. Steve, you're right and as far as production goes in both MPL and RPL. I think they're both outpacing new prime jumbo originations, at least in terms of securitizations as a (inaudible). We've participated in -- from last year, in acquiring senior mezz bonds off of RPL deals. We were also looking at equity investments in RPLs but haven't gotten there just yet. We're still evaluating it. On the MPL side, I think we're less active currently. Again, if opportunities present themselves we'll look at those and reevaluate there. But just the lumpiness of the cash flows don't give us comfort.

But RPLs I think have the highest yielding levered returns out there in the marketplace in resi space.

And do you think the ROE is on the levered RPL senior?

I think it's probably mid-teens with two or three turns of leverage on RPLs.

Pretty attractive. And those bonds have some significant subordination behind them as well, right. So --

Yes, I think on average, an RPL package, senior bonds have over 40%. The senior mezz have like 30% of credit enhancement.

And you're talking about a very -- you've got a floater and you've got a very short duration bond. Well, it's not a floater, but it's very short duration, right?

It is short duration, yes.

And it doesn't get called. And it extends to coupons (inaudible) on (inaudible) securities --

Great, yes, I love that trade. So okay guys, thank you for the comments and congratulations on where you sit today.

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

Well, thank you all for participating on our second quarter 2015 earnings call. I'd like just to reiterate that we're all very excited about the new opportunity in front of us and we're excited to talk to you on the next earnings call. Thank you very much.

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