Q2 2020 Chimera Investment Corp Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Chimera Investment Corporation second quarter 2020 earnings conference call and webcast.
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So what's the optimal sell quality. It is now my pleasure caring for which a lot of Investor Relations. Please go ahead.
Thank you Nicole and thank you everyone for participating in primary second quarter earnings Conference call.
Before we begin I'd like to review the Safe Harbor statement.
During this call will be making forward looking statements, which our prediction.
Traction 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 and our most recent annual and quarterly FCC filing.
Actual events and results may differ materially from these forward looking statements.
We encourage you to read the forward looking statement disclaimer in our earnings release in addition to our quarterly and annual filings.
During the call today, you 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 content at this conference call may contain time sensitive information and accurate only as of the date of this earnings call.
We do not undertake and specifically disclaims 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 second quarter earnings call for Clemmer investment Corp.
Joining me on the call today.
Our Chief investment Officer, Rob collagen or Chief Financial Officer, Tawdry, our lot of though our chief operating officer in VIX I'll go to how to work tropical Mark.
I'll make some brief comments then we'll hit won't discuss the changes in the portfolio and Rob will then review our financial results. Afterwards, we'll open up the call for questions.
I believe the first six months of 2020 will go down in the financial history books, It's one of the most volatile periods in modern Collins.
What's economy went from excellent dismal in the span of just a few months and the financial markets, especially with fixed income experienced record volatility and record intervention from the government.
In our space. Many levered investors were caught off guard by the swiftly falling off the crisis and they were forced to sell at the low point the market.
Fortunately, however was able to navigate through this difficult period by executing transactions, which enabled us to retain our high yielding and unique mortgage credit portfolio.
It's important to understand thatll be very difficult if not impossible to recreate all portfolio in the current low interest rate environment.
And that's what country in the fourth quarter or the ability to pay a meaningful dividend.
Which we would not have it's the opposite had been sold.
In the quarter, we took several actions that helped us augment our liquidity.
Usually the $374 billion, where your convertible bond.
We entered into a 400 million dollar three year revolving loan facility range by Aeris capital and we executed three new mortgage securitizations totaling over $1 billion, which significantly reduced our loan warehouse exposure and hope we opened the mortgage securitization market, which is a primary source for climbers long term financing.
Additionally, during the period, we negotiated longer term non worked out.
Who is your longer term nod mark to market repo and that's good facilities for our mortgage loans and credit related assets.
We now have approximately 75% about credit borrowings on longer term facilities and over 50% of them have no mark to market or limited mark to market arrangements.
While these actions have.
The short term effective increasing financing costs, we believe the benefits over the long term or significant.
Strengthened our balance sheet, enabling us to further withstand additional market volatility continued to produce attractive spread income and to make new investments will we see attractive asset opportunities.
This position is enviable given the uncertain economic conditions and the low return environment that we're currently operating within.
The Federal Reserve you stated that they expect to keep the fed funds rate you're bound to the next two years.
And that they will continue to buy large quantities of assets to support the financial markets and the U.S. economy.
We are proud presently witnessing the effects of these actions the 10 year Treasury yield is now roughly 55 basis points at a rate on the news 30 year mortgage dipped below 3% for the first time in history.
Current market expectations are that we'd be in this low rate environment for several years to cool and.
And that's a returns on all financial assets will be also low into the future.
Well the fed reserves asset purchases have not been directly focused on residential mortgage credit.
Purchases have started solidifying the markets and senior mortgage bonds have witnessed significant price appreciation.
We would expect that overtime deeper credit subordinate residential bonds could see similar moves.
Hi, burst portfolio higher yielding legacy assets should become ever more valuable at the fed continues to buy assets and returns in the market become ever more scarce.
Residential mortgage credit due to the size of the market and the slow recovery a pricing offer some of the best opportunities in the fixed income market.
The economics for loan securitization continues to be attractive at the credit curve remain steep.
Senior front end bonds are well bid, creating an opportunity to securitize loans and retain higher yielding Bakken subordinate investments.
The subordinate bonds have high relative yield and the potential for meaningful appreciation should markets normalize.
We've executed three securitizations in the period and retain the sport.
Deals.
Looking forward, we believed that there will be ample supply of loans for sale from the geographies.
Thanks, and this supply will create opportunities for us to make new investments for our portfolio.
Given the current low yield and low return environment, we think being able to create investments through securitization will allow us to continue to produce attractive results in this challenging market.
While this has been a very difficult period to navigate through we believe primary is well positioned for the future.
We have materially reduced our exposure to mark to market risk from a refinancings, which should help us manage through bouts of volatility in the future.
We've been able to retain our legacy portfolio profits, which will allow us to continue to produce meaningful dividends for our investors and what may be an extended period of low interest rates.
The retained portfolio also has the potential for book value appreciation is pricing returns to historical levels.
And finally, we believe there are attractive opportunities currently available in the residential below market and we have a team and the history of being able to use securitization to successfully pretty high yielding investments for our portfolio.
And with that I'll turn the call over to Mohit.
Thank you Matt.
As a result of unprecedented monetary and fiscal support provided by the government. The second quarter saw material improvement in both the equity and fixed income markets.
Parts of the equity markets are flat to up year to date, well treasury rates were stable in Q2.
But the rate stable and the fed rhetoric for lower rate for the foreseeable future volatility has subsided.
The crowding out effect created by the that's market intervention has been positive for all highly rated fixed income securities.
That's how do we get it was mostly focused on agency securities did not purchase residential mortgage credit.
There's a shortage of legacy credit assets available after a slow start in April you issue securitization volumes were brisk in the second quarter.
Senior tranches of securitize residential product improved steadily but its strongest performance in the latter half of the second quarter.
During the quarter, we focused on the liability side of our balance sheet and entered into three non mark to market facilities to finance $2 billion over non agency portfolio.
In addition, we have limited mark to market on 611 million of non agency securities.
As a result of these transactions approximately 54% or non agency borrowings are not subject to full mark to market risk.
As of quarter when the weighted average trend to maturity has increased to 698 days from 223 days in the first quarter.
To reduce the risk on our warehouse lines, we completed three securitizations totaling approximately $1.1 billion in season re performing mortgage loans.
Moving loans from warehouse the securitization as an important aspect of our portfolio strategy as it reduces the mark to market risk and improved risk metrics for the company.
After the completion of this quarter securitization, our residential mortgage loan warehouse stands at 263 million and its financed for one year without mark to market risk.
See I am 2020 dash, our three issued in May at 438 million underlying loan with a weighted average coupon to 5.28% and.
And a weighted average loan age of 150 months.
The average loan size and the RFP synchronization was 127000 and the average FICO was 651 with an average LTV of 80%.
We sold 329 million senior securities, where they 4.2% cost of debt.
I know retain a may 2022 calendar call option for the our three securitization.
See I M 2020 dash, our four at 276 million underlying loans with a weighted average coupon of 4.78% with a weighted average loan age of 168 months.
The average loan size in the our four was 127000 the average FICA was 598 with an average LTV of 75%.
We sold 207 million senior securities with a 3.2% cost of debt.
Hi, My retained a June 2022 calendar call option on the or for securitization.
In early July I remember completed a second rediscovered position of the year.
We issued see I M 2020 dash or five.
338 million underlying loan with an average coupon of 4.98%.
The onsite securitization had a weighted average loan age of 149 month and an average loan size of 152000.
The loans had a weighted average FICO 678, with an average LTV of 70%.
We sold 257 million no investment grade securities for the 2.5% half the debt.
More than 200 basis points tighter than our early may deal.
And in late July we issued 362 million see I am 2020 Das Jay won our first jumbo securitization of the year.
Overall, we're pleased with the current investment portfolio and as long term prospects.
We were able to navigate through this difficult period by executing transactions, which enabled us to retain our high yielding and unique mortgage credit portfolio.
Strong credit performance strength of institutional buying and the tightening up new issue credit spreads rolled positive components were cameras long term securitization strategy.
We have 13 existing since securitization totaling $7.5 billion available for call and refinancing over the next 12 months.
This provides an additional avenue for portfolio, performing and complements potential new enough investment opportunities.
We are continually monitoring our outstanding securitization for the best timing and the opportunity to execute our call optimization strategy and maximize long term portfolio performance for our shareholders.
Our agency CMBS continue to provide attractive spread income and liquidity for the portfolio, while providing superior call protection relative to residential agency pass throughs and this low rate environment.
Lastly, the reduction in Mark to market achieved this quarter leaves us with plenty of dry powder to make new credit investments.
I will now turn the call over to Rob to review the financial results for the quarter.
Thanks, Mike.
You can merits financial highlights for the second quarter.
GAAP book value at the end of the second quarter was $10.63 per share.
Our GAAP net loss for the second quarter was 73 million or 37 cents per share.
On a core basis.
Net income for the second quarter was 76 million or 32 cents per share.
Our economic net interest income from the second quarter was 121 million.
For the second quarter or yield on interest, earning assets was 5.7%.
Average cost of funds was 3.3% and our net interest spread was 2.4%.
Total leverage for the second quarter was 4.3 to one well recourse leverage ended the quarter at 1.8 to one.
Expenses for the second quarter, excluding servicing fees and transaction expenses were 17 million down from last quarter, primarily related to lower compensation expenses.
We currently have approximately 850 million in cash and unencumbered assets.
This is after we paid both are preferred and common dividends and pool.
We continue to monitor liquidity closely and look for attractive financing option to support our portfolio.
That concludes our remarks, and we'll now open the call for questions.
At this time, if you'd like to ask an audio question you may do so by pressing star and the number one on your telephone keypad again, not a star one well pause for just a moment.
The first question will come from the line of Doug Harter with credit Suisse.
Thanks, just just on the last point 850 million of Posh, you know kind of how are you viewing the right amount of cash to be holding given kind of the uncertainties, but coupled with kind of the improved financing you have in how should we think about you know ability.
Due to its employees more capital.
Hey, Doug Thanks for the question. So if you listen to comments from last quarter. We were at 650 million. So we're up about 200 million of cash and liquidity are unencumbered assets. Obviously as you heard in the comment we focus a lot on a securitization and locking up.
Long term financing this quarter I'm, so our liability side of the balance sheet is dramatically different.
Then last quarter, and obviously that puts us in a position I mean, I can better I'm sure low or Matt can talk about.
And looking at and pipeline.
Hey, Doug this is everybody.
The add on to Rob's comments, Yes, Q2 was focused on shoring up the liability side of the balance sheet, which we've done a we think the cash unencumbered assets. We have in hand, now give us some dry powder to deploy capital and attractive opportunities.
You too early on with sort of the liquidations forced liquidation that occurred gave some low hanging fruit for some investors there wasn't really much loan activity within the quarter one the season re performing side.
There was more of that was focused on the non QM side, but we think there's going to be ample opportunities to acquire assets and deploy the capital and liquidity we have on the balance sheet.
Great and.
And then Rob if you could just talk about kind of <unk>.
And what the incremental cost might be on kind of the improve structures on the financing a that you guys put in place in second quarter.
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Yeah, so as far as improved financing its interesting Ah interesting question I think.
You know, obviously pretty cold bid repo costs were dramatically lower haircuts were lower so.
Yeah, I get the way I looked at it is our expenses have gone up probably in line with more than most other people a in our space I think repo availability, especially in the non agency space is better than it was a few months ago, but still not.
Super active or liquid.
But looking out longer term as Oh, hopefully called the cases go down and remedies are in place people go back to work things will normalize and the opportunities there for us.
You know over time today and reduce our liability costs.
And then.
Our earnings I'm, sorry in the short term, obviously like a lot of people in our space or hot financing has gone up a little bit.
Right and Doug I'll add a little bit more to what.
Rob just mentioned.
Obviously on the repo recourse financing side.
I have gone up across the board, that's a knee jerk reaction to the liquidity that needed to be provided during a crisis, but on the non recourse side. You know we did three securitizations over the quarter.
First one in May and as we said in my opening statement the cost of debt that we issued that financing got it was 4.2% and by the time, we closed the deal at the end of July that cost of financing was 2.05%. So the securitization market is coming back theres a lot of demand.
On the senior parts of the capital structure and that financing cost has come in materially from where we started the quarter to where we ended and we think there is room to run even tighter there given the lack of legacy assets available.
Great. Thank you.
Our next question will come from the line is Stephen laws with Raymond James.
Hi, good morning.
You know a follow up to Doug's question. This in your prepared remarks.
Remarks, but.
You know when I think about leverage recourse I think one eight and then total a little higher you talked about new investments, but can you talk about where you see the leverage numbers moving as we think about portfolio growth maybe over the next 18 months and.
You talked about the liabilities in are these things that will be funded with reports that initially and moved to mark or non mark to market the future Securitizations or do you have enough capacity on non mark to market facilities currently to fund these moving backwards.
Thanks, Steven this is that might again I'll start Robin, Matt and also a pine on it or the non mark to market facilities are fully funded at the moment. So there's no capacity there to add more unless we were just started a new facility.
But as far as overall leverage and what we're gonna do going forward. We came into the year at 3.2 turns of recourse leverage we've taken that down to 1.8 turned to recourse leverage.
Do we think we're going to go back to pre covert levels not in the near term I think we're gonna be cautious in deploying the capital and making sure that we don't necessarily use recourse leverage unless it attractive and the tender it makes sense for us I think as Matt mentioned in the opening statements, where we could create.
Instead, we would retain all the investments we would make will produce.
Hi single digit returns on a cash basis with upside to performance.
I think people are still focused on forbearance isn't department.
And what the government is going to do as far as stimulus packages going forward and I think there is upside to credit performance here and that happened in Q1 and early part of Q2 was strictly illiquidity thing. If you look at the data supporting credit performance.
Actually been pretty solid and our portfolio hasn't really experienced much of a different from what was happening in genotype in March of this year.
Yes, I'll just a follow up on that.
I think as we get farther and farther away from the event that we had back in the end of March early April I think the financing markets at some point in the future will come back online.
And you could see the overall leverage of the company go up but we'd we'd have to feel like we're well out of the with more before we would do that and I think in the future that in some upside that we have on our balance sheet.
Great and well he doesn't follow up.
You talked about the potential upside and and that was really my second question. When I think about you know the prepared remarks, you talked about being able to.
You know not sell the asset hold assets clearly helped earnings given the cash flows generated but you know we've got a lot of unrealized marks of assets you still on from own from the first half of the year.
You know how do you think about data, it's a pretty significant number I believe so you know how much of those unrealized marks do you think or potentially recoverable I don't know how you handicap that around the poor visibility looking forward.
But to your point with liquidity driven marks another thing that seems like some of these assets are likely undervalued versus where they may.
What their value was six or 12 months from now so how do you think about potential recovery in magnitude and timing of the unrealized marks from first half.
Sure.
<unk>.
That's actually a good thing to focus on because if you look at the as I just mentioned what happened in March was strictly in liquidity driven event not necessarily a credit driven event and people are going to wait to see what happened to the asset performance in April may and June.
And there were some stress ron's done that a pandemic was going to create large unemployment, which played out but with the stimulus checks and the way our portfolio situated it didnt really materially affect the casuals or portfolio that dramatically. So we think the portfolio is undervalued and if you look at the performance of the portfolio both from a delinquency and loss.
Often lost endpoint as of Q4, two where we ended Q2.
Delinquency numbers are pretty flat I think as we've said repeatedly the portfolio in a 60 plus day delinquency number is right between mid east admit 9%. So if we remove the pandemic. We think we could get back and took the prices back to the levels of Q4, that's roughly over 550 million.
$1 of unrealized and now that we would get back that would affect book value by about two and a half dollars.
That is what we think the value of the asset says if you look at what happened from Q4 to Q2 in terms of rate movement. There is 140 basis point move in rates from two years to tenures at that rate rally should also have an impact on pricing.
Average duration of our non agency portfolio is probably around five years that would imply a price change of seven points now we're not going to get basis point for a basis point move in price appreciation. So she would hair cut that seven point move they take only 25% of that that's an additional dollar and a half of book value appreciation.
So we feel if markets normalized and return performance and performance was actually taken into account, but our book value should be anywhere between 13 to $14 worth attend 63, we're at now.
That's great color movie. Thank you for the details on that I. Appreciate you taking my questions I guess, Steven Let me just add one other thing there obviously, there's room for improvement but.
Yeah, we have the secured debt the liabilities on our balance sheet that we also mark to market and those have recover much faster the more senior securities those ever covered much faster most recoveries our on balance are uneven and so that's a short term decline for us because that's a liability on our books.
And those have come back and value much faster than the loans are securities have on our books. So again overtime it should all dropped to where.
He was pointing out but.
Just wanted to point that out from a the liability side and some.
Short term effects to book value.
Great Thanks for that color.
The next question will come from the line of Eric Hagen with KBW.
Hey.
As.
So the $5.9 billion in total repo what percentage that balances being used to fund non agency assets and what.
Type of collateral is on the repo one.
Eric This is that money. So morning will you have.
3.6 billion, a repo borrowings on the non agency side.
3 billion of that is insecurities.
600 million of that is in warehouse loans that we have.
Oh, that's 3 billion.
1.3 billion of that borrowing is on a non mark to market basis on the security side.
So those are our legacy assets the re remics, we created back in 2008 2009.
Some of the Middle Mezz position said, we've created off of our Securitizations. In addition to our risk retention pieces. So at once the gamut of what we own terms of what's being financed.
Got it and the 600 million and loans, what's the kind of collateral profile look like there.
But those that 600 million of loans is the season re performing loans that we've been acquiring so that number as I mentioned in the opening remarks has come down based on the securitization we completed in July 10th.
That number is a 630 number and has come down to now I think just over $300 million.
Have you.
You PB and I think $283 million, a borrowing which is on a one year non mark to market facility that was put into place in July.
Got it.
Very helpful Uh Huh.
Thanks, and then for the for the assets that you securitized.
Last quarter. The three deals that you ran through what was the loss adjusted yield on the tranches that you were saying some of those deals.
So in our base case ones the losses after yields anywhere between 8% to 9%.
Hey Tonight.
Yep.
Thank you guys so much.
<unk>.
As a reminder, in order to ask an audio question, it's like press star and the number one on your telephone keypad.
Our next question will come from line as Trevor Cranston JMP Securities.
Hey, thanks.
One more question on the on the financing side.
The 46% so the non agency financing that is still mark to market.
Can you kind of elaborate on how you're thinking about that voice if you're.
Sort of planning to incrementally continue to moved up more to own mark to market facilities or for how we should think about there going forward. Thanks.
Hey, traverse though.
A vast majority of that 46% our middle Mezz.
Securities off of securitization that we've done.
And given as a laid out in the opening remarks me up 13 deals that are all over the next 12 months.
We don't necessarily want to.
But those on longer tenors, if we do intend to call up enough to potentially Craig pay a break up fee. So I think we will keep those short I think the financing it those are money good assets.
And the counterparty that our financing are comfortable financing them for longer tenors too and work with us in the event, we would call those.
So that's a bulk of the 46% the remaining assets are legacy assets that in the event, we needed to read some liquidity through sales of non agency assets. It gives us the ability to do so that's what we want to keep those intentionally short and when I say shirt. I mean, you know three to six months of financing still.
Okay got it thank you.
And then Rob I think I think you might have just answered this but can you clarify sort of what the drivers of book value were the books. All your change were this quarter.
<unk>, because I could it seemed like credit spreads broadly speaking.
Seemed to tighten a decent amount for a lot about sort of close was.
Sure.
Yes, I mentioned the liability side of our balance sheet, which we do more was up.
Higher clipper higher basis than than the asset side, but the other piece is the the convertible issue that we raised in April that had a pretty big impact. This quarter, obviously was fantastic for liquidity and having that much or cash on our balance sheet during distress was re.
Really important for us.
But when you look at that from a book value perspective.
The convert alone or reduce book value by about $1.22 a share and we also have a cap all in place that reduce that further by about 15 cents.
We have not you know triggers the cap color at picked up our option on that so we could have a little bit of recovery of book value there but.
You know the convert did have a material impact on book value.
Sure.
Okay, great. Thank you for that.
And with that we are showing no further audio questions I will now hand conference back over commit for closing remarks.
Well, thank you for participating in the second quarter 2020 earnings I've heard investment.
We look forward to screen human November.
This does conclude today's conference call. We thank you for your participation and ask that you. Please disconnect your line.
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