Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to come and investment Corporation fourth quarter and full year 2019 earnings conference call and let Kathy.
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Thank you Maria Thank you everyone for participating in kind merits fourth quarter and full year earnings conference call.
Before we begin I'd like to review the Safe Harbor statement.
During this call me, we'll be making forward looking statement, which are predictions projections or other statements about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the risk factor section in our most recent annual and quarterly FCC filings.
Actual events and results may differ materially from these forward looking statements <unk>.
We encourage you to read the forward looking statement disclaimer in our earnings release in addition to our quarterly and annual filing.
During the call today, we may also discuss non-GAAP financial measures.
Please refer to our FCC filings and earnings supplement for reconciliation to the most comparable GAAP measures.
Additionally, the contents 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 will now turn the conference over to our President and Chief Executive Officer, Matthew Lambiase.
Good morning, and welcome to the fourth quarter 2019 earnings call for Cameron Investment Corporation.
Joining me on the call. This morning are Mohit Marria, our Chief investment Officer, Rob Colligan, Our Chief Financial Officer Chaudhry are a lot of got our Chief operating Officer, Vic Salvo, Hi, merits head of capital markets.
I'll make some brief comments I know, it's got to changes in the portfolio. Rob will then review our financial results afterwards, well open up the call question.
Before we get started to like the point out that seven cents of our core earnings in the fourth quarter came from one time gains on securities that were called away from our portfolio.
The game was the result of legacy non agency bonds that we wanted a discount getting called away from us apart and for prepayment penalties that we received on Ginnie Mae commercial loans.
Non agency mortgage backed securities have cleanup calls, which can be exercise when the outstanding loan collateralisation.
In the securitization falls below certain threshold.
As our portfolio of legacy non agency bonds gets older underlying deal factors got lower and it becomes more likely these cleanup calls water.
Cleanup calls however, can also create onetime losses when interest only bonds or are you always get redeem sooner than originally expected.
Given the low interest rate environment, and the strong market for residential mortgage loans I would expect to see onetime gains or losses in the quarters ahead, and we will highlight them in our earnings announcements going forward.
In the fourth quarter timer opposed to the total economic return a 1.7%.
And we had a 14.1% total economic return for the full year up 2000 in my team.
I'm very pleased with these results as we successfully matador portfolio through a very difficult market.
Taking advantage of improving conditions, now and adding to our portfolio.
As I've discussed on previous earnings calls repo rates for much of 2019 were elevated well other interest rates fell.
In the fourth quarter, we finally started seeing our repo funding cost decline and to begin to reflect the federal reserve rate cuts.
The yield curve also steepened in the period, which helped a slower prepayment expectations and reduce our amortization costs.
Lower funding costs. This lower amortization contributed the increase in our net interest margin for the period.
Looking ahead, we anticipate the fed will be on hold and that our funding costs should remain relatively stable at these lower rates.
As interest rates fell to 2018 prepayment rates on agency mortgage backed securities increased we were successful in redeploying These agency.
Paydowns and some sales into new investments in residential credit.
In the fourth quarter, we added $1 billion and she's in re performing loans to our portfolio, bringing our total loan purchases for the full year of 2000 $19 billion to $2.3 billion.
We have a well established history of issuing mortgage securitization and amid the man for the bonds for more securitization for me it's wrong.
The fourth quarter, we completed five securitizations totaling $1.8 billion.
And for the full year, we completed 10 securitizations.
<unk> senior notes from mortgage loan Securitizations enabled us to lock in term financing and create high yielding long term investments for our portfolio.
Sound underlying fundamentals of the U.S. economies, such as low unemployment attractive mortgage rates and a lack of housing supply makes us believe that residential mortgage credit.
Should continue to perform well.
As we look to the new year, we feel good about our portfolio. The investment team continues to source new loans for purchase.
There is existing loan securitizations continue to perform well and funding costs are lower and stable.
Beginning in 2020, we will adopt new Cecil or current expected the credit loss accounting rules, which will reduce some of the yields on our legacy non agency bonds.
However, this is a relatively small part of our balance sheet and we do not feel that these accounting changes will hamper our ability to pay an attractive did.
Accordingly last night, the board of Directors announced the first quarter dividend of 50 cents per common share and that it expects to pay $2 in common dividends for the full year 2020.
This is the fourth consecutive year. The camera has announced his intention to pay $2, an annual dividend, which I think underscores the quality of the portfolio and the stability of the cash flows that we create securitization.
I continue to believe that our balance sheet as well position to benefit from the strong U.S. economy, and we're all optimistic of our prospects for the year ahead and with that I'll turn it over double he talks about the portfolio.
Thank you Matt.
Without the 90 sovaldi here in the fixed income markets.
And your Treasury notes began 2019, yielding 2.68%.
Then fell to a low 1.46% in early September before rising again in the fourth quarter to end the year at 1.92 person.
The short end to the used car was also up at all.
Well, you're treasury notes began the year yielding 2.49%.
To a low at 1.39% for closing 2019 at 1.57%.
The 210 your view as to yield curve was about 15 basis points steeper year over year.
And the federal reserve cut overnight funding rate three time for a total of 75 basis points.
Or much of the year repo rates very much stickier have taken a longer time football.
In recognition of the September salaries are began adding liquidity to the repo market.
At year end have nurse average cost a repo borrowings on agency securities was 2.1%.
From 2.2 week person at the end of third quarter, and down 45 basis points from 2.55% or the same period in 2018.
As there are staggered maturities and a repo financing rate movements are not immediate take time to improve.
Based upon current repo rates so far in 2020, we are constructive on further cost improvement for our agency financing.
This year's large drop in interest rate carried over to the mortgage market and U.S. homeowners rushed to refinance their mortgages, causing elevated prepayment rates on agency mortgage pastors.
Through a combination of sales and pay down how much agency pass through ended the year at 6.1 billion down from 9 billion at the end of 2018.
I think if stated in past earnings calls the view that liquidity offered an agency securities not only as a source of spread income, but also as a source of capital to redeploy into mortgage credit assets when attractive investment opportunities are available.
Be diligently reinvested these agency pay downs and to re performing residential mortgage loans.
For Q4, we settled on about 1 billion in mortgage bonds and a total of 2.3 billion in season re performing loans for all of 2019.
Many of these loans have been securitized.
As of yearend, we are every 1.2 billion and our loan warehouse.
Most of which is being held with intent or future securitization.
I never had a very active fourth quarter and Securitizations.
We closed five transactions totaling 1.8 billion underlying loan.
Moreover, we performing loan deals and one was a prime jumbo loan.
From our warehouse, we securitize poor under 64 million re performing loans and see I M 2019 dash aren't too.
The steel was rated by Moodys and DBRS.
The loan collateral at a weighted average coupon of 4.6% and a weighted average loan age at 152 months.
The average loan size for the Arcudi almost 136000 with an average FICO 644.
And there are sold 358 million bonds, providing a 2.6% caught that.
We continued with our securitized loan portfolio optimization and called to see I M 2016 dashboard.
Alone for then Relever into a 343 million T. I M 2019 dash our three.
The deal was unrated and had a weighted average coupon of 6.8% and.
On a weighted average loan aid to 161 month.
The average loan size or the or three deal.
72000, with a FICO 661.
Hi, Maris old 291 million bonds, providing a 2.6% constant that.
The previous securitization or does that cost of 4.9%.
So through optimization afforded by our call strategy, we saved approximately 225 basis points and refinancing, let's see I M 2019 dash our three.
The our three deal was the second time re lever for our 2014 Springleaf purchase.
Our abilities are Relever. These loans has benefited our portfolio Oh further reinforcing the proof of concept of cameras optimization and call strategy.
See I M 2019, or for an hour or five were also issued from existing re performing loans in our warehouse.
See I am to have the 19 dashboard for was up 321 million Nonrated skill.
The underlying loans at or whatever who front of 6.2% with a weighted average loan age of 158 months.
The average loan size on the our four was 169000 with FICO 621.
Russell 257 million bond debt cost of 2.8%.
And we also securitized 315 million loans and see I am 2019, our five.
The steel was also rated by Moody's and deep arrest.
You are five had a weighted average coupon of 5.4% with a weighted average loan age of 152 months.
The average balance with alone supposed to 168000 and had a peco 660 watt.
Hi, My Russell 252 million bonds with a debt cost of 2.8%.
And lastly for Securitizations this quarter compared to the second prime jumbo deals a year.
Issued 338 million, Yeah, 2019, Jay too.
The deal with new collateral only two months old and had a weighted average coupon of 4.1%.
The average loan size for the tier II was 766000, there's a fight to 766.
The loans at an average LTV of 70%.
The prime Jumbo deal is not consolidated our balance sheet.
2019, it was a very strong here for our portfolio with a combination of securitization portfolio optimization and capital allocation strategies.
Excessively navigate it 2019, its market volatility and drop in interest rates.
Our agency pass is provide illiquid source of capital for loan purchases or agency CMBS portfolio performed as expected and cameras mortgage credit financing strategy through securitization has enabled us to lock in longer term financing and more consistent spread income for our portfolio.
Market demand for fixed income spread product remains strong in 2020.
Notes issued from that's been shops have performed well for investors and the same shelf is recognized as a consistent issuer for senior mortgage backed securities.
We have loans available in our warehouse, so securitization and you have in excess of 5 billion of existing Sims securitizations that up call dates in the calendar year 2020.
As always we will monitor system deals that they near their call dates we will evaluate economic potential for portfolio improvement, we're optimization and call strategy.
I'll now turn the call over to Rob to review the financial results.
Thanks Mary.
Hi, merits financial highlights for the fourth quarter and full year 2019.
GAAP book value at the end of the fourth quarter was $16 at 15 cents per share and our economic return on GAAP book value was 1.7%.
Based on a quarterly change in book value in the fourth quarter dividend per common share.
Our economic return for the year was 14.1%.
GAAP net income for the fourth quarter was 112 million or 60 cents per share.
And 341 million.
$1.82 cents for the year.
On a core basis.
Net income for the fourth quarter was 120 million or 64 cents per share.
421 million or $2 in 25 cents per share for the year.
We had approximately seven cents of income in the fourth quarter that was derived from securities primarily held at a discount and were called during the quarter.
While this may occur from time to time, we don't expect this level of income every quarter and then some quarters, we could have a loss related to interest only securities that are called.
We will provide details on this income whenever it becomes material to quarterly earnings.
Economic net interest income for the fourth fourth quarter <unk> hundred 64 million.
And it was 597 million for the year.
For the fourth quarter the yield on average interest, earning assets was 5.5%.
Our average cost of funds was 3.1%.
Our net interest spread was 2.4%.
Total leverage for the fourth quarter was 5.5 to one.
While recourse leverage ended the quarter at 3.4 to one.
For the quarter or economic net interest return on equity was 15.3%.
GAAP return on average equity was 10.6%.
Expenses for the fourth quarter, excluding servicing fees and transaction expenses.
18 million down slightly from last quarter.
That concludes our remarks, we'll now open the call for questions.
Thank you Sir the floor is now open for questions.
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Our first question comes from the line of Doug Harter of Credit Suisse.
Oh, Thanks, just hoping you could give us a little more detail on the on that pipeline of potential are callable deals you know I guess, just you know how we should think about the the pacing of that over the course of the year and if the relative cost of funds.
Being you know how the relative cost of potential cost of funds savings would compare to the kind of what you were able to accomplish in the fourth quarter.
Sure. Good morning, a this is Mike how are you willing job.
Well, Bob as mentioned in the opening remarks, we have eight deals that are callable in 2000 funny totaling about 5 billion of you PB in terms of loans.
Securitized debt issued against those that's just over 3 billion.
And I think a based on what we were able to achieve in Q4 and the strong bed for the market then.
Q1 at least and you'll see that carries forward for the remainder of the year via cost savings on that that newish your debt over 150 basis points, so pretty strong savings.
On that issuance potentially.
Great.
And then I.
I guess, you were able to buy kind of.
You know legacy loans and also jumbo loans in the fourth quarter, you know I guess as you look out of kind of the the relative attractiveness of those two.
Potential asset classes, you know I guess, how do they how did they compare today kind of where do you see yeah them. The opportunity you know for incremental capital deployment.
Sure.
Again, I mean, I think we've sat on numerous the earnings calls have you still fine the season re performing loans base very attractive I still given where we can finance term finance our that the backend equity pieces have double digit returns.
The convexity profile has a lot better than new issue origination seen what happened in 2019 as rates rallied significantly prepayment bullets on the agency portfolio picked up significantly and we've seen some of that on the new issue Prime jumbo in investor deals as well so we still like.
The RPL space, we still think there's ample supply coming from the GRC using some money center banks.
But having said that you know, we're always evaluating and we want to do newish your business as well and if the jumbo in investor space looks attractive in the Levered returns are free to deploy capital there as well over the 10 Securitizations. We did in 19 five were on newly originated collateral and fiber on season re performing deals.
Well the balance of almost 50 50, and even on you PV basis, and we're hoping similar success in 2020.
Great. Thank you Mike.
Our next question comes from line as Eric Hagen of KBW.
Hey, guys. Good morning, Thanks for the Cecil disclosure I know that it will reduce your forward yields and I realize that the impact is relatively minor but is there also are reserve charge that gets reflected in your book value at the time, let's see so became active or is that is the only impact the forward yield adjustment.
The only impact for us as a forward yield adjustment I'm sure you're looking at a lot of the banks and maybe some other companies that do had some credit reserve like a day one credit reserve.
But because most of our securities that are impacted which you're right. The small corner of our balance sheet that that's impacted most of them are at a unrealized or have an unrealized gain.
There's no requirement for us to put up any reserves.
Got it okay. Thanks for that disclosure and then just don't the legacy loan low balance loan trade has obviously worked out really well for you guys. Just how how big do you think the legacy low balance market is at this point or I think a better question is just how active do you think the trading from other asset managers is going to be in that mark.
Going forward.
Hi, Eric this is that might.
Yes, weve been able to successfully aggregate at large portfolio of low loan balance. If you look at some of those traps mentioned on the Securitizations on this year the balances are significantly higher than the 85 $90000. If we were able to aggregate involved in 14 and in 16.
The average balance and what we're acquiring now ranges anywhere from 150000 to 285000, I think more of the RPL stuff that are coming out of the GRC reflective of apps. So yes, it's still low loan balance relative to where the jumbo production this but and the convexity profile remains to somewhere.
On a $250000 alone.
As it is on a $85000 alone given those sort of season re performing nature of them.
Okay. Thanks for that I'm, just trying to gauge how big the market is or how big that you know how active the turnover is in that market is it I think he just responded to doug's question that a lot of it's coming from banks and the Jesse's, but can you quantify how much you know.
How big.
That market is at this point or how how Uh huh.
Maybe.
Just the G.S.G., if he's alone between Fannie and Freddie probably still have north of a billion $100 million, though he isn't performing loans that they need to pare down.
And that's assuming no new loans enter the re performing space something that default, but they have to work through so it's the portfolio remains static I think it's still north of 100 billion that they would need to dispose it.
Got it thanks for that Okay, and then one more for me I mean, a fairly good chunk of your dividend was characterized last year as a return of capital as opposed to ordinary dividends is that simply a timing difference between recognizing positive mark some subordinated securities as they pulled apart and the taxable impacts is just.
Occurring later in time and I I realize that.
Book to tax reconciliations can sometimes be a little complicated I just want to get a sense for what drives that that characterization for you guys.
Sure. The other piece of color, there's always timing differences between GAAP and tax but maybe.
Yeah, we did have some losses on her hedges that are taken upfront for gap, obviously removed from core but taking over time for tax and that's one of the bigger drivers of the.
Core to the tax difference this year.
Yeah, and I've got a static or that the tax number is you know one moment in time, it's a very complicated like to your point is very calm calculate complicated calculation and and I don't think it gives a lot of meaning to the to the business. I think you have your I have to look at it over very long period of time, and then I'm not sure what you would learn.
It's a it's I would just take it for them to not for a forward looking measure.
Of course, you up just wanted to get a sense for what what drove that characterization, but so thank you. Thanks for the comments Chris.
Our next question comes from Atlanta, Trevor Cranston JMP Securities.
Hi, Thanks, good morning.
Thank you had mentioned in the prepared comments that you benefited in the fourth quarter from a slower prepay speeds on the agency book and it looks like the yield on the agencies picked up a decent amount this quarter.
Could you provide some color on how you're thinking about that going forward what the rally in rates, we've seen so far in one Q how much do you think speeds made picked up pick up in one Q and going forward.
Actually relative to kind of how fast they got during the fall last year. Thanks.
ER or this is that might again.
Began to slow down just due to seasonal factors.
Right now, but as a market has rallied in the 30 basis points from year end through today, we do with spring approaching we think speech will tick back up I don't think they get back to the same level that you saw in the fall September October from a lows hit in August but.
But we do think speech will pick up from where we are you haven't Jan in fab up marginally.
Okay Gotcha.
The second question.
The the income that was generated this quarter from the legacy Securities, which are called and I guess some of it was also penalty income on the CMBS.
Could you provide any additional color I'm in terms of especially the legacy Securities book in terms of you know how much of that you estimate is currently callable <unk> sort of get a sense on.
How much of those gains might be coming through in the future. Thanks.
Sure I'm you know it's hard to.
Estimate the exact timing of that type of income.
You know you have certain deals where you don't expect them to be called than they are and other ones where.
We'll have a bond with a very low factor and you expect it could be called at any time in it and it isn't you know what I can say a fair amount of our non agency portfolio is in that category you know the older legacy items, but.
I can't say, we have way more discount or positive income coming then a premium on iOS. So overtime, we should have a very good ER positive impact, although it could be you know up or down quarter to quarter.
Got you Okay. That's helpful. Thank you.
Our next question comes from line of Kenneth Lee of RBC capital markets.
Hi, Thanks for taking my question just a quick follow up on that last question in terms of B you callable securities.
HM realize it's probably hard to forecast from quarter to quarter, a in terms of where they do gains or losses, but.
Could you just tell us, maybe under which macro assumptions or or interest rate levels could you see a little bit more.
You know more more losses within the Ipos or Conversely, more I'm more games on the other securities or just in terms of the backdrop, regardless of the actual you know obviously behaviors. Thanks.
Good morning, Ken.
I think is gonna be less dependent on rate I mean, a lot of these securities were issued in all five always think so seven so they had the ability to sort of refinance if they cut and and why a lot of these securities or impaired.
But as just normal amortization. These deals continue to factor down all the deals have a.
10% to 20% deal cleanup calls, which they are approaching add these deals continue to relever, which is why some of the deals have been called over the last year I have more meaningfully into Q4.
This past quarter and now we think there's a lot of factors that go into making something callable just as we look at our Securitizations, there's a cost of the called.
You know where did you can refinance and given the strong bed for loans have evolved into starts over the last couple of quarters that execution is helping.
And she or making a lot of these legacy deals more callable.
Gotcha.
And just one one follow up Bob if I may.
Wondering if you could just highlight some of the key drivers for the movement in the book value per share a sequentially in the quarter. Thanks.
Yeah on the on the credit side spreads for.
Effectively unchanged quarter over quarter, maybe slightly wider the biggest driver of the lower book value was the change in rate. So the market sold off probably about 30 basis points.
From September Thirtyth, two December and that puts some pressure on book value and year over year. The book value is still higher which is sort of the bigger take away given the volatile markets.
Got you very helpful. Thank you.
Our next question comes from one of Matthew Howlett I've known there.
Thanks, guys.
Did you give a cadence on the agency MBS portfolio made because there's a the repays come in.
Good to continue.
Run down in and with capital reallocated.
Yes, I mean as you mentioned in the opening remark.
You down sales, we had for the year in the agency portfolio happened to be deployed in not alone investments in that.
Equity base, there has grown as Oh, yeah, if we continue to see opportunities as we've said on prior calls that as a source of funding for for those acquisitions.
Okay then.
With the recourse leverage comes down now see naturally it as a as he is the presumably higher leverage on that book So with the when you look at the Companys capital excess capital position is that is that improving as agency book runs down to where it or is do you. Just do you look at it sort of his awash with.
Good redeploying and lower leverage.
Got it strategies May I guess, how do you look at just the excess capital decision of the company today at 3.4 times <unk> economic leverage.
And I think we just really doesn't watch right most of that capital is being deployed into loans than we've had a lot of success.
Wiring loans over a 2019 reported over 2 billion I was hoping for some of our success and.
In 2020, and given the Paydowns were achieving on the pass throughs and that should help fund those acquisitions and keep leverage or.
Oh.
Okay got it okay.
Another follow up just just in the new issue more kind of Ashley last quarter. When asked again new issue you got your active but doesn't seem like your active in non QM clearly that mortgage doubling again this year well can you give us an update on anything you are you looking you look at at that asset class.
Yeah, I mean, I think as mentioned on the left or any follow up that's a market. We look at all the time, we look at where patients are coming in.
As I mentioned, the convexity profile of that product is.
Gives us some pause given the premiums and you didn't to acquire those loans speeds have been elevated in the premium erosion is is there. So we're sort of cautious on adding that the convexity profile of the launch we've been able to acquire the over 2 billion is far superior and you know the Levered returns on what we retain.
Hey, more than meeting the dividend that need to be paid out. So together, we continue to evaluate it but that you've had a lot of sex and continuing to acquire RPL loans and on the new issue from as we mentioned, we did five and newly originated collateral deals both jumbo and investor loans, where the subs are also Maria.
Attractive from a return on equity is done.
Yeah, just reconfirm that mid mid mid to low teens, you are saying on on a net levered return.
I would say low to mid.
Low to mid teens.
Got it okay. It's pretty attractive. Okay. Then next question the 10 billion of a one to 20 Ninee repo at 12 31 could you give us some general numbers, but where did where did that role that you know a little over the last 45 days, where did it go where was it isn't where did it rollout.
Yeah, I mean that as we mentioned the cost of our agency funding at year end was to 10.
You know and we were.
Got it seems there was any disruption as we had at the end of 2018.
But you know the fat didn't checked a lot of liquidity over $500 million of you know cash in the market to make sure that didn't get volatile, but as we had entered Q1 of 2020, a repo rates have been pretty stable. I mean, you see you a one month LIBOR as financing is a few basis points above that held meaningfully but we are fed funds.
Got it but again, a lower than where we ended Q4 of name 19, So I would say in the.
No 175 to 180 area range.
Got it great great. Thanks, a lot appreciate it.
Thank you.
Our next question comes from minus Lee Cooperman, I'll make a family office.
Thank you you guys continue to execute very well I appreciate that heretofore, we have filed a policy of holding a dividend flat and for you to buy stock back whenever its traded at go below book value.
Very understandable because they've got fine job you guys have done a stock shows the mean meaningful premium to book going forward or how do you intend to employ capital as regards you know dividend increases supplemental dividends or stock repurchase.
Well I think right now well, we think the balance sheet and our capital is pretty bite sized for the for the business opportunities that we're seeing I think we have plenty of dry powder. If you will in our agency book of business that we can.
You know deploy into residential credit when we see opportunities and that's what I think team has been doing a great job of finding out those opportunities.
You know I don't know, we would buy back stock and so at the prices in the market right now and I think if we had the the excess income I think you do a special dividends a if we had that so you don't have any excess income now that that would require a special dividend no no and I think going forward you know if he gets was.
Two weeks, where you do you would we wouldn't we would certainly favorite that over the buying back stock instead, the current price well congratulations guys you're doing a very fine job for the shareholders. Thank you.
Thank you we appreciate that variable.
[laughter]. Thank you got ones. Our final question I'll now turn the floor back over to Matthew Lambiase for any additional for closing remarks.
Well. Thank you all from participating in the primary investment Corporation's fourth quarter 2019 earnings call and we look forward to speaking you later in the year with first quarter's earnings.
Thank you, ladies and gentlemen for joining us for today's Kinda investment earnings Conference call. You May now disconnect. Your lines at this time and have a wonderful day.
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