Chimera Investment Corp (CIM) 2015 Q3 法說會逐字稿

Good morning, and welcome to the Third 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 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 Mr. Matthew Lambiase, President and Chief Executive Officer; Mr. Rob Colligan, Chief Financial Officer; and Mr. Mohit Marria, Chief Investment Officer; and Mr. Choudhary Yarlagadda, Chief Operating Operator; and Mr. Bill Dyer, Head of Underwriting.

I would now like to turn the conference call over to Mr. Matthew Lambiase. Mr. Lambiase, the floor is yours, Sir.

Thank you. Good morning, and welcome to the third quarter 2015 Chimera earnings call. I'll make a few comments on the quarter, Mohit will give an update on the portfolio, and then Rob will review the financial results for the period. Afterward, we'll open up the call for questions.

First, I would like to update you on our transition to become a fully independent internally managed mortgage REIT, which became effective on August 5. We continue to make strong progress on our transition to internalizing the Company's investment management function and we are on schedule to become a completely self-managed REIT by the end of 2015.

Since our last earnings call, Chimera has physically moved its entire team, inclusive of operations, into new office space. We have begun hiring new personnel to successfully complete the transition and we have been working on completing the transfer of technology and systems.

While Chimera had maintained separate dedicated portfolio and accounting teams when it was externally managed by FIDAC, we had shared legal, technology, and administration personnel. To ensure a seamless transition to internal management, our Board negotiated a transition services agreement with FIDAC that allows us to continue to draw down upon their resources until we have fully established our internal infrastructure.

Internalization of management is an important positive development for Chimera. Both the Board of Directors and management believe that over time, internally managed REITs will be valued at a premium to externally managed REITs because the structure more closely aligns Chimera's management with the interests of our shareholders.

Chimera's management's compensation is now directly tied to shareholder returns generated by the operation of the Company, which increases the focus on long-term shareholder value creation.

Our shareholder-friendly approach is underscored by the $250 million share buyback program that we announced in the second quarter earnings call. The first purchase under this program was to buy back Annaly's 900 shares, or roughly 4%, of Chimera's outstanding equity. Over the remainder of the third quarter, the Company successfully repurchased an additional 7.6 million shares of Chimera's common stock, valued at approximately $105 million, at an average dollar price of $13.81.

All of these additional purchases were executed in the open market. In aggregate, this quarter the Company repurchased $231 million of its stock, completing 92% of the authorized program.

During this period, the equity markets priced MREITs at a deep discount to their net asset value and at very high yields. We found repurchasing our shares to be a compelling use of our capital and it will create long-term value for our shareholders.

Further, we believe internalization will enable us to achieve one of the most competitive cost structures in the sector for our shareholders. Historically, Chimera has been one of the lower-cost operators in the mortgage REIT space. Our fees were 1.5% of equity with no performance bonus. In 2014, the Board of Directors negotiated a lower management fee of 1.2% of equity from our external manager.

Now, through internalization, we believe our anticipated cost savings to shareholders should be an additional $4 million to $8 million annually. We plan to have one of the lowest G&A expense ratios in the mortgage REIT sector when the internalization is complete.

Let me move on to discuss another key development in the quarter. We are pleased to announce this morning that Chimera's captive insurance company has been accepted as a member of the Federal Home Loan Bank of Des Moines. The Federal Home Loan Bank system has been a rock of stability for the funding US mortgage market since 1932.

Federal Home Loan Bank membership offers a number of superior funding options for mortgage collateral. These options are longer in term and more certain in periods of market turbulence than many other alternatives from other counterparties. FHLB membership is very complementary and additive to the funding capacity of our business. We now have relationships with 29 financial institutions that provide us with funding.

To further enhance our management of both risk and liquidity, we've been working to increase the number of non-agency [repo] counterparties and the duration of funding of our non-agency securities. Chimera now has 12 non-agency repo counterparties with a weighted average repo term of 197 days.

Liquidity for non-agency financing has become more readily available and we have executed with counterparties offering repo terms as long as three years.

While the fixed income markets in the third quarter continue to be volatile, we believe Chimera is well-positioned. With uncertainty surrounding a Fed decision to increase short-term rights, elevated agency mortgage-backed curtainment speeds, and a widening of credit spreads in certain products has made it a very challenging environment.

We have taken important actions to position our portfolio for this environment, including reducing interest rate risk by lowering our agency portfolio by $2 billion, increasing the notional balances of our interest rate swaps, and extending out the non-agency financing. These steps have served us well to lower the volatility in our book value and to increase our funding liquidity.

While these actions had a cost for the earnings stream of the Company today, we believe that given the uncertainty of the market, defending book value for the future is the right path to maximize value for shareholders over the long term.

Chimera operated at 2.5 times recourse leverage and produced a dividend yield of excess of 13% in the quarter.

Over all, we're very excited about the future of our business. As an internally managed REIT, we believe we have the corporate structure to drive shareholder value creation and that residential mortgage credit still provides some of the most attractive risk-adjusted levered returns in the fixed income market.

We continue to see opportunities to acquire attractive mortgage assets and look for new ways to enhance our risk and liquidity portfolio in order to continue to produce high and durable dividends for our shareholders in the quarters ahead.

Now with that, I'd like to turn the call over to Mohit to discuss the portfolio for the third quarter.

Thanks, Matt, and good morning, everyone. I will briefly review macroeconomic factors first and then go to the investment activity for the quarter.

As Matt mentioned, the third quarter was volatile for both global fixed income and equity markets. Continued concerns around slowing emerging markets economies and falling commodity prices contributed to the Federal Reserve and its monetary policy remaining on hold at their September (inaudible) meeting.

During the quarter, we saw a rally in interest rates accompanied by a broad-based widening of risk premiums. Spreads widened across most fixed income assets and mortgage market was not immune. Spreads widened on agency MBS, non-agency MBS, and CMBS.

While spread-widening is negative near term for book value, it improves our earnings potential as investment returns on both agency and non-agency assets have increased.

Our credit-sensitive portfolio continues to perform well. Home prices, delinquency rates, and [household] information are still showing improvements. The expensing fundamentals continue to bode well for our seasoned non-agency mortgage portfolio. Given the strength, we continue to deploy capital and continue to seek new non-agency investments. During the third quarter, we increased our non-agency holdings by $115 million.

In addition to our secondary activity, Chimera successfully called $699 of Springleaf 2012 2A and issued $699 million of CIM 2015-3AG deal. Let me take you through some of the key economics of the transaction.

When we exercised the call on the Springleaf deal, there were $499 million of bond outstandings paying an average interest rate of 4.14%. Chimera's equity investment in the deal was $200 million. In the new deal, we were able to sell 521 million senior bonds paying an average interest rate of 2.18%.

We were able to reduce financing costs by over 195 basis points and achieve a more favorable advance rate, reducing our equity position to $178 million. These additional proceeds generated through better advance rates were able to be reinvested in non-agency MBS.

Chimera has four remaining Springleaf deals we could potentially call over the next year.

With uncertainty surrounding Fed monetary policy and the impact of low rates on prepayments, we have been defensive on our agency MBS component of our portfolio. As discussed in prior earnings calls, Chimera has over the course of the year reduced our agency MBS exposure by $2.5 billion.

Furthermore, Chimera has also increased its hedges by $1 billion late in Q2.

At the same time, we have deployed capital in agency CMBS. This portfolio has grown to over $850 million since the start of the year. These securities offer a better [convecting] profile than agency RMBS securities due to the prepayment protection they offer. With the Federal Reserve still mulling over monetary policy moves, adjusting the portfolio makes a less rate-sensitive product to help longer-term returns as well as preserve book value.

With the yield from remaining [steep] asset prices reflecting increased risk premium, low leverage on our existing portfolio, and financing costs remaining stable, Chimera remains in a good position to generate above-average return for its investors.

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

Thanks, Mohit, and good morning. I will now review selected financial highlights for the third quarter. Our economic return on equity for the quarter was a positive 1.4% based on a decrease in economic book value offset by dividends per share.

GAAP net loss for the third quarter was $48 million, down from $116 million last quarter.

On a core basis, net income for the third quarter was $98 million, or $0.50 per share, down from $109 million, or $0.53 per share, last quarter.

GAAP book value ended the quarter at $16.38 per share, down 2.1% from the second quarter, while economic book value ended the quarter at $15.28 a share, down 1.7% from the second quarter.

Third quarter net interest income was $144 million, down from $150 million last quarter.

The yield on average interest-earning assets was 6%, down slightly from 6.1% last quarter, and our average cost of funds was 2.6%, up from 2.5% last quarter.

Our net interest spread was 3.4%, down from 3.6% last quarter.

The reduction of interest income and spread was primarily driven by a defensively positioned portfolio and increased borrowing costs as repo counterparty providers increased rates in anticipation of a rate hike. In addition, swap costs were higher and elevated prepayment fees continued this quarter.

Although it was a challenging quarter to manage interest rate risk, our net interest return on equity was 15% for the quarter, unchanged from last quarter.

The annual dividend yield for Chimera was 14%, based on the third quarter dividend of $0.48.

During the third quarter, we purchased 16.6 million shares, or 8% of shares outstanding, and we are authorized to purchase an additional $19 million of Chimera's stock in the future. We will see the full impact of the buyback on earnings in the fourth quarter.

The calculation of earnings this quarter was based on average outstanding shares of 198 million, while we currently have 189 million shares outstanding. Quarterly earnings would have been $0.52 per share based on the current shares.

Moving to expenses, expenses are generally in line with prior quarter. Prior to the internalization, the combination of management fees and G&A expenses were running at approximately $15 million per quarter. This expense run rate excludes deal expenses for securitizations and servicing fees for consolidated loan securitizations that we do not control

We expect expenses to remain close, or slightly higher, to this level for the fourth quarter as we finalize the majority of transition initiatives.

Chimera has leveraged consulting and other professional service firms during the transition, which started this summer and will continue through the end of the year. As the transition initiatives wind down and we finalize hiring, G&A expenses, specifically for professional services, will decline but will be replaced by compensation expenses for individuals that we have and will hire.

At this point, all senior positions of the Company have been filled and we're actively recruiting for the few remaining positions we have open.

Related to compensation, our Board of Directors has restructured management compensation to better align the management team with our shareholders. To achieve this goal, a large portion of executive compensation will be paid in the form of restricted shares. The first grant is expected to occur of the first quarter of 2016. And the related amortization of the stock compensation will start then and will continue, generally over a three-year vesting period.

There are a number of moving pieces related to expenses -- but to summarize, we expect G&A expenses, excluding one-time securitization costs and servicing fees, to run approximately $13 million to $14 million per quarter in 2016, a $1 million to $2 million cost savings per quarter compared to the prior externally managed structure, resulting in one of the lowest expense bases in the sector.

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

(Operator Instructions) Steve Delaney, JMP Securities.

Good morning, everyone, and thanks for taking the question. Rob, just to confirm -- your $0.50 core EPS, I don't believe you added back the one-time deal expenses of $2.4 million; is that correct?

That's correct. Yes, that would have been another $0.01 but we don't exclude those. We highlight it because the securitization costs can be a little bit lumpy in the run rate, but it is a real expense so we don't exclude it from core.

Got it. Because obviously it's cash. Okay, fair enough on that.

Matt, you guys have been very aggressive with the buyback, basically doubling almost what you did what Annaly. But you're about 92% utilized. Any thoughts as to whether the Board would be receptive to giving you a fresh incremental authorization just to have some flexibility, depending on where the stock goes?

I think that's up to the Board. I know we do have 8% of the authorized buyback still to go, so I don't think they'd make any determination until that's all been used up; and it's really the Board's decision what they want to do.

Understood; okay, thank you. And just finally to pick up on the comment about descending book value and lowering interest rate. Clearly, you've done that -- 2% down is going to show up, on average, across the agency and hybrid REITs. That's going to be a very good performance in this quarter for reasons that you guys know better -- as well as everyone else.

But I was just wondering -- looking at your agency allocation, and I think Mohit said you're down $2.5 billion. But as we look at that, you're currently 23% or so of your equity, it looks like to me. We look out to 2016 -- do you have a strategy to maybe further lower the agency allocation as you find additional attractive opportunities that would be consistent with meeting your [40-act] exemption?

Yes, I think that's right, Steve. I mean, ideally we'd like to have less agencies on the book and we'd like to drive the capital with mortgage credit assets if they become more attractive. They are becoming more attractive. I think liquidity in the mortgage credit market and even the agency market is pretty bad going into year end.

I think there'll be some more opportunities for us potentially with the price actions where they are. And like Mo said earlier, your spreads are much more attractive than they were earlier this year right now. So ideally we probably will look to increase some of our mortgage credit holdings if liquidity continues to be poor going into year end and spreads continue to be wide.

Yes. And I'll just add to that. I mean, we've added to the [resi] credit book all year and with spreads wider going into year end, as Matt alluded to, we continue to add credit-sensitive assets as opposed to rate-sensitive assets.

Yes. And Mo, have you started to look more closely at any of the GSE risk transfer securities? I haven't heard you mention those specifically.

We've looked at them but we have not participated to date in those transactions. We've looked at stuff that Wells Fargo and Chase have done on the [Fillmore] sort of credit risk transfer, which is (inaudible) to us, and we've participated in the inaugural deal last year. But since that point, spreads have tightened quite substantially and any time an opportunity presents itself, we'll take advantage of it.

Got it. Well, thanks for the comments, guys, and Rob, really appreciate the clarity on earnings -- excuse me, clarity on expenses. I know that was a hot topic on the second quarter call, and that helps us a great deal. So thanks for the comments; look forward to seeing you guys next week. Thanks.

Thank you.

Sure thing.

Brock Vandervliet, Nomura Securities.

Great, thanks for taking the question. I know Steve took a crack at it, but I'll follow up. I guess obviously Board decision on the buyback, but it seems like you were very aggressive. You're down to kind of tag ends relative to the existing authorization. The rest of your book has been shrinking. It would seem like that should be a continued compelling use of capital.

Yes. I mean, I think like I said before, Brock, it's the Board's call what they want to do. We certainly found it to be the right thing, especially in -- frankly, in August it was very hard for anybody to argue that buying back stock at the prices that were available in August was not the right thing to do for the shareholders over the long run. We think it's -- currently it's a very compelling value.

Okay. Just on the yields and costs, it seems like there's been a pretty steady grind-down on asset yields and an uptick in costs. You touched on some of the drivers there, but any sort of color or guide looking ahead on what the overall spread could be?

Well, obviously we saw repo counterparties, as I mentioned, increase their funding costs. I do think that the drop that we saw in the spread this quarter was maybe not as significant as we've seen in other quarters. I think we're starting to see some stability.

But when you compare our spreads to our peers, I think the thing that you'll see is our legacy portfolio is much higher-yielding than others. But obviously it's not a permanent asset and will burn down over time. It's our job to find other interesting opportunities that can maintain a very good risk-adjusted return over time.

Yes, I guess absent other growth, there'd be no reason not to expect further yield declines going forward; correct?

Well, the other piece that we have is leverage. Our leverage is very, very low. We could increase the spreads by adding leverage.

It's actually one of the issues of having such a good legacy portfolio is that we have a lot of assets that have very high yields in the Company that we bought and put in the books back five, six years ago. And they are thankfully very slowly paying down, but when they do pay down, it's very hard to replace something that's yielding 16% in this marketplace.

So as time goes by, it really becomes an issue of, okay, we're going to have to take leverage up to maintain the same amount of income in the portfolio over time. And we're certainly low enough levered that that all works for us.

Okay, thank you.

Thanks, Brock.

Doug Harter, Credit Suisse.

Thanks. Just a follow-up on that last question. If you could try to help us put some range around how much capacity you would have on the leverage side and which pieces that would sit at.

I mean, we have capacity both on the agency and non-agency side. We're right now, as Matt alluded to in his opening comments, 2.5 levered. When you count the recourse leverage, we could comfortably take that up to at a minimum of 3 times leverage and then we could reevaluate the portfolio at that point in time. But given the spread-widening that's occurred since the start of the third quarter, we think that should be pretty accretive, and that we have plenty of capital to do that.

And I guess the spread-widening -- has that gotten to a point where you're actively sort of taking leverage up now, or do you kind of wait and expect more spread-widening before doing that?

The mortgage market currently is relatively illiquid, I would say. Earlier in the year and certainly last year, there was a lot more liquidity in the mortgage credit market. I think right now Mo and I both believe that the market's kind of liquid going into year end. There's been several large dealers -- the Deutsche Banks of the world and other people -- that have been scaling back their operations and I think the market is readjusting to people exiting and new people coming in.

And the year end -- it would be hard for me to believe that we're going to get more liquid and better going into year end, frankly. So I think there'll probably be more opportunity later in this quarter than there is right now.

Got it. And then, just touching on the cost structure. I mean, I would agree with your assessment that being internally managed is a long-term positive. How do you deal with -- of how scalable are the costs as you've now taken out 8% of your shares and a fair amount of your equity? Will you be able to kind of scale down the costs by a comparable amount to sort of keep the expense ratio kind of where you guys want it?

Yes, I think we can. And I think we're poised as well, and I think the benefit that we see is if we do scale up, we won't see any big increase or meaningful increase in expense. So I think we thought about it more the other way -- if there's growth in the future, it doesn't come at 150 basis points for every dollar of capital we raise.

Right. No, I think it's clear that it works on the way up. I was just wondering on -- since you've rightfully bought back a fair amount of your stock, how we should think about the expenses in that context.

Yes, I think the numbers that we put out, we were thinking about them more in terms of total dollars spent. But I take your point; maybe we'll come back to you with some more clarity on the basis points. I don't think we've really discussed internally maybe even future buybacks and we would scale expenses down. We were thinking more on the up side.

Okay. No, makes sense. Thank you.

Charles [Madlin], Wells Fargo.

Great, thanks. Good morning, guys. Appreciate the color on expenses and cost savings. But as we look into 2016, could we expect a normalized run rate for expenses starting in the first quarter, or how should we think about that from a timing standpoint?

I think when you look at the first quarter, you'll see a normalized run rate at that point. The majority of our internalization efforts will be done by year end. So I would think that costs will be relatively steady and stable starting the first quarter of 2016.

Okay. And as a follow-up, again, as we look into 2016, there's a number of tailwinds to earnings, which you've outlined, including expense leverage, buybacks, and the benefit of securitizations.

Now, with that said, could you comment on the alignment of core earnings and taxable earnings and whether we could see potential up side to the dividend given that you're covering it by a couple pennies now, and with the tailwinds to earnings that we're thinking about for 2016?

We haven't forecast and provided guidance on 2016 yet. One of the things the Company has done to provide stability is to pre-forecast dividends. We are in the process of looking at 2016 results; we'll discuss that internally as well as with the Board and make some recommendations early part of next year. But it's a little early to provide that information.

Okay. And if I could get one more in -- it looks like there was about a $200 million increase in the agency commercial portfolio. Can you just give us some color around the nature of those investments?

Sure. This is -- we've invested in agency CMBS securities, multifamily project loans, stuff of that nature to reduce our agency RMBS exposure. We feel that the prepayment protection that the agency CMBS offers is more accretive and less dependent on what happens to rates and the Fed outlook.

Okay. Great, thank you.

Thank you.

Mike Widner, KBW.

Good morning, guys. I think you've covered most of it. Let me just ask kind of a small follow-up here, but you mentioned a couple of times kind of taking the agency portfolio down ahead of potential Fed tightening, etc. That was earlier in the year; in this quarter it actually grew a little bit Q over Q. I mean, not much, but a little bit. And I didn't see anything about adding swaps or hedges or anything like that.

So just curious if you could comment on that. Are you happy with sort of where it stands and is that what this is a reflection of? Or do you still think that you might be shifting capital away from agencies into credit or whatever?

Yes. I mean, the ultimate goal is to shift capital from agencies to credit-sensitive assets. And as you alluded to, the portfolio was up slightly. That was just more reinvestment. I think the goal was to keep it flat quarter over quarter; obviously there was some spread-widening in the MBS space. To the extent that leaks into Q4, we would take advantage of that in the near term as we find other opportunities in credit to invest capital. I'm sorry?

I was just going to say, just to be clear on that, I think what I'm hearing you saying -- and correct me if I'm wrong -- is that with the spread-widening in agencies, you actually find them relatively more appealing right now just because the spreads widen. So we might actually see that continue to go up slightly before falling? Is that how I interpret what you said?

It could unless, again, if something happens and there's redemptions from hedge funds or other opportunities in credit that present themselves between now and year end, the primary focus would be to take those opportunities and deploy capital there. But if agencies widen, we would (inaudible) opportunity to potentially look to add there in the near term.

Got you. Makes sense; thanks.

Lee Cooperman, Omega Advisors.

Thank you. Appreciate all the information you've given thus far. This is four or five questions, and you can handle it in any order you want. I'm not sure I understood the comment on internalization -- you said something about a $4 million to $8 million core save. Was that your best guesstimate at this time what you would save by internally managing versus external manager? That was question 1.

Question 2 -- in terms of management, the Board, whatever, which book value do you guys identify with more, think more realistic -- GAAP at $16.38 or economic at $15.28? My impression is that we will gravitate towards GAAP, but just curious which number you look at.

Third, the question was asked on the buyback. There's a lot of shares. Let me just say this -- if we can earn 13% to 15% on equity, we're not getting credit for an increased dividend. And I would just as soon, if we could be buying back our stock at 80% or more below the correct book value number, and you have optimism about your outlook, I would favor maintaining the dividend and taking as much cash as we can generate to buy back equity. So just as a one vote, to give you some guidance to the extent that it's relevant. And I think it would be a great use of money, buying back stock at 80% or lower book value, assuming we can do 13% to 15% on our equity. So that's kind of a statement rather than a question.

And then finally, the option program that you're contemplating -- do you have a sense of what percent of the outstanding shares that would represent?

And I guess there's one additional question. Over a cycle, do you guys have a view of what normalized return on equity would be for the Company? What you think you could sustain on average over a cycle? Thank you for any help you can be.

Hey, Lee, just to clarify that last question -- you're looking for what our stabilized return on equity would be?

Yes, over a cycle.

Okay. Why don't I start there and work backwards? So obviously it's up to us to return a good risk-adjusted return. I think we feel on a regular basis we should be low teens. I think of REITs paying out anywhere from the high single digits -- 7%, 8% -- up to 12%, 13%. So we're at the higher end of that range.

And I'll dovetail that with the buyback. Obviously, our open market purchases at around $13.81 a share -- that was bought back at a yield of 13.9%, which we find compelling. I think in the market today, maybe pre the current widening, I think it was hard to find investments that would yield that 14% to 15%. So obviously that buyback, we felt, was good and accretive.

It depends on where the stock continues to trade. If it continues to trade at lower levels, then as you said 80% or we can buy it at a 14%, 15% yield, it will continue to be attractive. If it starts to trade up and we start to get credit for all the activities, whether it's the buyback, internalization, cost saves, low leverage, stable portfolio and we start to trade up, maybe we'll take the foot off the gas on the buybacks and obviously look to buy, as Mo mentioned, credit-sensitive assets.

As far as the GAAP and economic book value, obviously the economic book value has been a legacy disclosure that we've had. It represents the assets that we own on a nonconsolidated non-GAAP basis. It's a way to look at the portfolio. If we had to liquidate absolutely everything today in our portfolio, that's what the value would be.

But obviously the collateral value in the GAAP assets represents some future value that, to the extent that there's appreciation, as we mentioned, there's home price appreciation. A lot of the homes and mortgages that we own and we look at now, when Bill and his team are looking at the credit characteristics, they do have equity in them. It's not like where we were in 2008 and 2009 where a lot of people were underwater.

So even if there are some issues, we are seeing more equity in homes than there were in the past. So it's a longwinded way of saying there's equity and value in the assets that over time will accrete to our subordinated bonds as the senior bonds pay off.

So we would expect the economic to start migrating up towards the GAAP value over time.

And as far as the internalization costs, yes, that $4 million to $8 million is off of our current run rate. So if you would have compared where the Company would have been assuming 120 basis points on management fee plus its existing G&A compared to a fully internalized management structure, we expect to pay $4 million to $8 million a year, roughly $1 million to $2 million a quarter.

And I think maybe you misinterpreted or I didn't properly phrase my question. On the economic or GAAP book value -- let's just take $16 as an average of the two -- over a cycle, what kind of earnings could that book value generate? Could we generate a 13% to 15% ROE on a sustainable basis?

I would maybe temper that a little bit. It's been a tough cycle, spreads are compressed. I would say maybe 11% to 13% -- I probably wouldn't push it to 13% to 15%. Obviously, we've been conservative managers of equity and wouldn't want to try to crank leverage or take undue risk to get to a 13% to 15% hurdle.

But in this market, where the 10 year's at mid-2%s, for us to earn 12% or so, or 11% to 13%, in that range, we think is a good rate of return in this market.

Yes, right. Just to kind of go back to one question, I think about 2Qs ago, 10 Qs ago, you changed the wording a little bit about the dividend and you made a comment that I think $0.48 was the minimum expectation.

I'm not lobbying for dividend increase, but I'm just curious -- if one was to poll the Board or management and your choice was to bump a dividend -- because I guess if you add back the nonrecurrings, you are more than adequately covering the dividend, which is better than a lot of your competitors, who are not earning a dividend. Would you think the Board would prefer re-upping the buyback and keeping the dividend constant? Or raising the dividend in lieu of increased buyback?

It's a really good question. I think obviously being in the REIT space, no one ever wants to cut their dividend. So we're very hesitant to ever push the dividend up too high and then have to cut.

Just to remind everyone, we were one of the few in the REIT space that actually increased their dividend in the first quarter. We were at $0.45 a share last year; we moved that up to $0.48 and we feel like we're covering that with our earnings today.

It's been a tricky year; we're starting to look out and forecast 2016. Obviously, given the uncertainties in the markets we haven't provided a lot of forward guidance on where we think earnings will be in 2016. But we feel good about a nice, solid, stable dividend and we'll probably give more guidance about that piece next year.

As far as buybacks versus increasing the dividend, it's a good question. I think it's something that we'll continue to discuss with the Board. Either way, I think it's compelling and it's important for us to continue to pay out a low-teens return. And we can get to it either way -- buy buybacks or increasing dividends.

I would just like to add to that, Lee, that we have the ability -- and we had the ability all year -- to crank up leverage and increase the quarterly returns, had we wanted to do that. But when you do that, you take market risk and you put your book value at risk.

And we deliberately have been trying to lower the interest rate risk on our portfolio going into this year end because Janet Yelland was on the tape earlier in the year saying that she was going to raise rates. And whether or not she does in December or not is still up in the air. But we take it very seriously; you don't want to fight the Fed if they're going to go, and we think you want to take a defensive position.

Now, we're in a great position because we can be defensive. We can still produce a 13% return and we can be defensive going into year end. I think that's the right place to be.

And you're right -- we'll have to figure out, when we get more clarity out of the Fed, whether we take up leverage or we increase, and it's going to be dependent upon where the stock price is, I think.

Well, you guys are doing a terrific job, so I'll bet that you'll figure it out better than I'll figure it out, but I think they will raise in December.

I just wanted to make the point -- an 11% to 13% ROE, if you can do it, ought to make the stock sell over time at book value. So if we could buy back 80%, 85%, or lower of book value and you're already yielding 14%, I would channel as much of your free cash into repurchase rather than raise the dividend.

Well Lee, as you can see from our actions in the quarter, we completely agree with you and appreciate your comments.

Great. Thanks for the good job you're doing for us.

Thanks, Lee.

Matthew Sporer, Lakewood Capital.

Hello?

Hey, Matt.

Hey guys, how are you? Thank you for taking my call today. So just a quick question -- first I would just echo the comment that very pleased to see the level and size of the buyback that was done in the quarter; and certainly the prices that it was -- accomplished that.

I just wanted to make sure I don't miss something here, but when I look at the reported core earnings was about $0.50. But if I take your quarter-end share count, that bumps it up to about $0.52.

And then, if I kind of adjust out for the transaction fees and what I think would bridge to your run rate expenses after internalization, I get that as adding another about $0.02 to quarterly core earnings. I wanted to know if you guys agree with that math or if there's something I'm doing incorrectly there.

No, I agree with you. The securitization costs were a little bit over $2 million, so that'd be $0.01. And then if we do achieve $1 million to $2 million cost savings per quarter, you're right --we'd be $0.02 up.

Yes, because when I looked at compensation, G&A, and net management fees, I had you guys at about $15.5 million, so if I used the high end of the number you put out, that's kind of an incremental $1.5 million. And if I take the $2.4 million of deal expenses, that's kind of about $4 million of nonrecurring or -- slash -- incremental savings so that would add about $0.02. So I have you guys kind of at a normalized run rate core earnings of about $0.54 a share.

That's about right for now. Obviously things change quarter over quarter --

Sure, absolutely. I was just trying to think about kind of like what our exit run rate core earnings is versus the dividend, and appreciate that it can be volatile from quarter to quarter.

Sure. The only other thing I'll mention on core earnings -- we studied the metric a lot and looked at the peers. And what we found is certain of the peer include, and certain of the peers exclude, costs on futures. We are one that -- we include those expenses in core. So that expense, since it's a realized expense every quarter, we had $9 million of expense this quarter.

So if we were a different reporter, our core earnings would have been another $0.045 higher than maybe if a peer was calculating it. So it's just another thing to highlight.

We didn't change our core calculations for a lot of reasons. We wanted to keep it consistent and it is a realized cost, part of the reasons why we left it in. But we did see that some others don't include that in their calculations. So what we did is we included the cost on our futures in a footnote. That way, if people want to, in their own internal models, for comparison to the peers, that number is now available and we'll look to continue to provide that in case people want to benchmark versus others that do include it in their number.

Okay. Yes, that's helpful. All right, great. That's all I had, guys; appreciate it.

At this time, we will conclude our question-and-answer session. I would now like to turn the conference call back over to the management team for any closing remarks. Gentlemen?

Well, thank you very much for joining us today on the Chimera third quarter 2015 earnings call. We appreciate the time you spent with us this morning and we look forward to talking to you in the new year. Thank you.

And we thank you, Sir, and to the rest of the management team for your time also today. The conference call is now concluded. At this time, you may disconnect your lines and again, we thank you all for participating. Take care and have a great day.