Q3 2020 Chimera Investment Corp Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the <unk> Investment Corporation third quarter 2020 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer.
Recession, if you would like to ask a question at that time simply press star and the number one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue press the pound key.
Yes that will pose your question you pick up your handset to provide optimal sound quality. It is now my pleasure to turn the floor over to Emily more of Investor Relations. Please go ahead.
Thank you Laurie and thank you everyone for participating in <unk> third quarter earnings Conference call.
Before we begin I'd like to review the Safe Harbor statement.
During this call we will be making forward looking statements, 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 and our most recent annual and quarterly EPS you'd see filings.
Actual events and results may differ materially from these forward looking statements.
I 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, we may also discuss non-GAAP financial measures.
Please refer to our SEC filings and earnings supplement for a reconciliation to the most comparable GAAP measures.
Additionally, the content of this conference call may contain time sensitive information that's 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 third quarter 2020, <unk> earnings call for primary investment Corporation.
Joining me on the call. This morning are but he's marry up our chief investment Officer, Rob Colligan, Our Chief Financial Officer, Todd, We got a lot to go our COO Vik salvo, the head of our capital markets.
I'll make some brief comments then mohit will discuss the changes in the portfolio and Rob will review our financial results.
Afterward, we'll open up the call for questions.
Camaro continues to work remotely and I'm happy to report that the team is safe and a remote work environments have been successful.
Over the past six months, we've taken many steps to strengthen our balance sheet protect our desirable credit assets and stabilize the earnings stream of our portfolio.
These steps included selling agency mortgage backed securities selectively selling agency CMBS negotiating new non mark to market financing bridge and lowering the company's overall recourse leverage.
The actions taken over the period enabled us to participate in the market recovery of asset prices from the depressed levels that we experienced in March.
For the quarter cameras book, probably you appreciate at 12%.
To $11.91 per share.
We generated 33 cents of core earnings and.
And we paid 30 cents in common dividends.
Resulting in nearly 15% economic return for the period.
The rebound in residential mortgage prices this quarter can be attributed to a very strong housing market, which has been boosted by a generational low and U.S. interest rates.
The COVID-19 pandemic has had a dramatic effect on the housing in the United States.
The market for single family homes is thriving as many families are fleeing cities for more spacious quarters in the suburban and rural areas of the country.
Families across America are seeking additional living space for home offices home classrooms and seats outdoor environments. Accordingly, the Stanford Institute for economic policy research.
42% of the U.S. Labor Force is currently working full time from home.
Demand for single family homes is booming.
The rate of existing home sales rose in September to 6.5 million homes, the highest level since 2006.
The available inventory of existing home sales.
Has decreased nearly 20% from the previous year to 1.5 million homes.
At the current pace of home sales all the inventory currently on the market could be sold in less than three months.
Much of this housing demand is driven by record low borrowing rates orchestrated by the federal reserve.
Since March the Federal reserve has increased its balance sheet by 75% to over seven trillion dollars, helping to provide low interest rates and ample liquidity to the mortgage market.
The average rate for 30 year mortgages was recently reported at 2.8% the lowest rate on record, which dates back to 1971.
Additionally, fiscal stimulus from the federal government for COVID-19 really high.
He added over three trillion dollars into the economy and its helped money mortgage borrowers through this difficult economic period.
Both political parties in Washington are currently discussing additional fiscal stimulus packages, which if enacted we believe will help continue to score troubled borrowers and be constructive for both the housing and the mortgage market.
A robust housing market.
With low mortgage rates and the government support provide a very strong case for owning residential mortgage credit.
As of quarter end, nearly 90% of primaries investment portfolio was allocated to mortgage credit.
The mortgage securitization market has also returned to near pre pandemic level and.
And in some cases better as a result of lower interest rates and comparable advance rates.
This quarter primary completed three securitizations, well committing to purchase $640 million of mortgage loans.
Due to the improving housing fundamentals and better credit conditions investor demand for highly rated senior mortgage securities is very strong.
There is a frequent issuer be securities, which enables us to secure long term non mark to market financing for our credit portfolio assets.
Our investment team continues to find opportunities and if successful adding to our portfolio for future Securitizations.
The housing market is one of the few bright spots in the U.S. economy.
And higher housing prices could contribute to better mortgage credit fundamentals.
In a world of low investment returns, having a high yielding portfolio with a favorable credit profile is an enviable position to be in.
We believe that primary portfolio is well positioned to take advantage of these positive trends.
And to continue to produce strong dividend income for our shareholders in the quarters ahead.
And I'll now turn the call over to Mohit to discuss the portfolio.
Thank you Matt.
The 10 year Treasury ended the quarter with a yield of 68 basis points.
Down from 1.92% at the start of 2020.
The overall magnitude of this rate movement has generated price appreciate appreciation and 10 year Treasury notes of approximately 10 points since the beginning of the year.
Our agency CMBS investments over the last five years have primarily been Ginnie Mae project close these.
These securities carry government guarantees and due to explicit prepayment lockout and penalties the ginnie Mae permanent loan certificates or longer duration assets.
The price performance of these assets has greatly benefited as treasury rates have fallen.
During the third quarter, we acted on the strong price performance and selectively sold 659 million securities from our agency CMBS portfolio.
With the sales, we harvested approximately 65 million and gain and a plan to reallocate capital into mortgage credit.
The objective of the reallocation as long term optimization of the portfolio income for the benefit of our shareholders.
We continue to monitor our agency CMBS holdings relative to their market values and their explicit call protection to maintain a rightsized an optimal portfolio or agency CMBS.
Our remaining agency CMBS holdings at quarter end was $1.8 billion, comprising 10% of cameras total investment portfolio.
The new issue market for securitized products remained strong in the third quarter and spreads on certain parts of the capital structure have approached pre COVID-19 levels.
Tighter spreads and lower absolute interest rates create compelling opportunities for frequent and well recognized issuers like merit to meet investor demand for security.
For the third quarter Chimerical, three securitize transactions totaling a little over $1 billion.
The senior note from all three deals carried investment grade ratings.
In July we issued C. I M 2020, dash or five but 338 million loans from our existing loan warehouse.
The underlying loans in the deal had a weighted average coupon of 4.98% and a weighted average loan age of 149 months.
The average loan size and they are five transaction was 152000 and had an average LTV of 70%.
The average FICO score of the borrowers was 678.
We sold 257 million senior Securities from this deal and retained $81 million in subordinate notes and interest only securities.
Our cost of investment grade debt for C. O M 2020 dash, our five was 2.25%.
With a 76% advance rate.
Separately and two transactions, we securitized pools are prime jumbo mortgage loans and a pool of agency eligible investor mortgage loans.
See I M 2020, dashed Jay one was our first prime jumbo securitization for 2020.
The deal had a 362 million loans with a weighted average coupon of 3.76% and a weighted average loan age of six months.
The average loan size was 732000 and had an average FICO 766 at an average LTV of 67%.
See I am 2020 Dash I envy, one was our first agency eligible investor loan securitization for 2020.
This deal size was 335 million with a weighted average coupon of 4.31%.
It had an average loan size of 332000.
The loans had an average FICO of 765 with an average LTV of 64%.
Ajay one and the I.N.B. one securitizations are not consolidated on our balance sheet.
We invested 22 million in these transactions for non agency RMBS portfolio.
During the third quarter, we committed to purchasing over $400 million of fees entry performing loans and post quarter end, we securitize the loans into C. I am 2020 dash our sex.
Strong investor demand for senior notes enabled us to move quickly from purchase to securitization.
The deal price on October Thirtyth and is expected to close in early November.
Report the details of this transaction on our fourth quarter 2020 earnings call.
We continue to invest in residential business purpose loans.
These loans, commonly referred to as fix and flip provide an attractive high yielding short duration asset for our portfolio.
The market.
For these loans continues to expand and is well supported by a positive housing market and repeat business purpose borrowers.
For the year, we successfully purchased approximately 135 million and business purpose loans and ended the quarter with approximately 210 million on balance sheet.
The average coupon on this portfolio was 8.57%, but the weighted average LTV of 80%.
Our investment portfolio is well positioned as we approach year rent.
The market trends and single family housing are positive and the securitization market as strong.
At quarter end, we had 412 million loans on our mortgage warehouse for potential future securitizations and have ample liquidity to and opportunistically acquire new pools of loans.
On the liability side of our balance sheet.
We have taken steps this year to lower the impact of mark to market risk on our secured financing.
Recourse leverage is materially lower on the year and it currently stands at 1.3 times capital.
We have ample liquidity to make new investments.
And as part of our call optimization strategy, we actively monitor our outstanding Securitizations for optimizing our long term debt structures.
And as of September 30, If America had 5.8 billion of outstanding securitized debt and 16 separate deals that as either currently callable or will be callable through the end of 2021.
I will now turn the call over to Rob to review the financial results.
Thanks, Mike and good morning.
Our review parents financial highlights for the third quarter.
GAAP book value at the end of the third quarter was $11 or 91 cents.
And GAAP net income.
For the third quarter with 349 million.
$1.32 per share.
On a core basis net income for the third quarter was 80 million or 33 cents per share.
Economic net interest income for the third quarter was 125 million.
For the third quarter the yield on average interest, earning assets was 6%.
Our average cost of funds was 3.5%.
And our net interest spread was 2.5%.
Total leverage for the third quarter was 3.7 to one.
While recourse leverage ended the quarter at 1.3 to one.
Expenses for the third quarter, excluding servicing fees and transaction expenses were 17 million in line with last quarter.
We continue to closely monitor liquidity and have approximately 1 billion in cash and unencumbered assets as we look for new investments and financing options to support our portfolio.
Optimize investment returns.
That concludes our remarks, we'll now open the call for questions.
Thank you at this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue press the pound key.
Our first question comes from the line of Doug Harter of Credit Suisse.
Oh, Thanks, just start off with an easy one if you can just tell us what the outcome of the election will be [laughter] [laughter], but back to kind of mirror can you just talk about the returns you know how they look on the jumbo versus invest.
Property versus re performing you know and.
None of the amount of capital you can deploy you know kind of per per dollar of loan that you're buying into each of those.
Sure. Good morning, Doug This is oh.
I'll start.
Thanks.
Where we see the greatest opportunity continues to be on the season to be performing side.
We've done.
Securitization so far this year.
And we think there is still ample supply of that from the GE as Heath, especially with what's happened this year with forbearances into apartments on the GSP portfolio. So we still think there's ample supply there to come that will create the largest opportunity.
And on the funny on the securitization side as we mentioned on our opening remarks, the securitization markets pretty strong if you're able to get term financing on depending on a rated or non rated securitization up to 80% of your capital stack plays and yields of mid high ones on rated two.
Mid twos, I nonrated basis, though the backend equity returns are going to be high single digits on a cash basis.
On the leverage you could go to easily double digits, 12% to 15%.
On the jumbo side originations are picking back up there as well there was a low in the second quarter as opposed to cope with and been origination is somewhat mitigated but.
There the returns are not as attractive as on the seasonally performing side, but we want to be involved in the new issue origination business. So we still find it to be attractive the returns are going to be in the mid single digits, but there's more leverage available.
And then on the agency eligible investor loans and loans.
That.
Don't necessarily get delivered to the G fees, we think there's a larger opportunity there is an opportunity set to acquire loans in the coming months. So we think the returns there match the season re performing side. So we're pretty optimistic and we've done one of each of those securitizations in Q3.
And then can you just talk about.
So it's kind of the depth of the financing for the subordinate bonds today and kind of your comfort and you know in kind of a you know your liquidity position you know it gets kinda wouldn't hit another kind of pockets of volatility around those financing levels.
Sure I mean, even.
Even pre covered the depth of that market wasn't great and our counterparty selection was limited we wanted to make sure that people ever financing those assets for US we're involved both on the underwriting side and on the cash trading side.
So just to not have market disruptions in prices as we experienced in Q1.
So I think that's first and foremost secondly, the tenor of those financings was never on a month to month basis.
The shortest financing we had on our credit assets was around three months.
And in some cases, we had financings as you recall as long as three years.
Where the what transpired in Q1, we were sort of mitigating any.
As much as possible the mark to market risk on those assets we've.
Weve locked up a lot of non mark to market or mark to market holiday financing for those credit sensitive assets and over the last few securitizations. We've done we're actually holding the equity piece as for cash and not putting them on recourse borrowings at the moment just with some of the uncertainty around cove. It after the elections.
Oh, thank you.
Your next question comes from the line of those George of KBW.
Hey, guys. Good morning, and she's just in terms of the level of cash and liquidity.
A reasonable level for that as you know as you get comfortable with deploying more capital.
Hi, guys. This is that might again, I mean, I think wed.
With some again some of the uncertainty we just highlighted as it relates to election outcomes.
What happens with Cove. It I think we're pretty confident with what we have in place in terms of liquidity, both on a cash and unencumbered basis.
We're also hopeful that as a result of some increased volatility heading into year end that we're always hopeful for that create some investment opportunities to buy some assets. So I think as I think we have a decent mix of liquidity, we have some ability to add assets here and as the closing comments of.
With my prepared remarks, we're able to acquire some loans that we were petrified into a securitization pretty quickly. So I think that all in cash needs would be mitigated given how strong the securitization market as for us.
Okay that makes sense. Thanks, and then last quarter, you noted that if asset prices recover you could see book value, maybe getting back into the 13 to $14 range is that still kind of a reasonable expectation just updated thoughts there.
Yes, I mean as reflected in the book value performance for Q3 were still mindful that but thing there's plenty of upside in the portfolio. If we were fortunate enough to retain all the credit assets and we've taken the last decade to build out and we think just goes a liquidity issue not a credit issue as reflected in the overall.
The format of our credit assets and more generically in the market the concerns around for Branson departments have come down quite significantly from the highs and made to where we stand today.
Okay, great. Thanks.
Your next question comes from the line of Kenneth Lee of RBC capital markets.
Hi, Thanks for taking my question I'm, just wondering on <unk> in terms of the the funding side I Wonder if you could just share your thoughts on whether you still see a potential to further extend out a financing maturities.
Yeah, but I think you know separating the funding from the agency force of the credit side. Our agency fundings remain short at the curve there was pretty flat between one month and one year, but you give up a lot of Optionality. If you want to optimize the portfolio on that side. So we prefer to keep that short to give us some flexibility now they.
Stated, we did sell some of our agency CMBS positions.
Book, some gains which will redeploy into credit sensitive assets.
On the credit.
Side of the financing book, Yes, we do prefer that to be longer if we as Matt said, we've entered into some long term arrangements there up to five years in some cases and to the extent that is available. We will continue to use that to the extent needed, especially to match off on the deals that we have every call and re lever.
Gotcha and then in terms just a quick follow up.
Wonder if you could just share with us how you how you think funding costs could trend over the near term there.
So like like the asset side of the equation, where spreads have come in quite meaningfully since you know the wides in March financing costs are also coming in I think on the agency side again, there are pretty sticky and being out of the fed has done.
And illustrated what they're going to do and those costs are around 20 to 25 basis points between one month to 12 month on.
On the credit side, depending on.
The credit profile I mean, those spreads have come in and I think we'll continue to come in as the overall use of financing has decreased from the street I think theres a balance sheet to be had there. So I would think as we head into Q4 and Q1 financing cost there should come in as well.
Gotcha very helpful. Thanks.
Your next question comes from Stephen laws of Raymond James.
Hi, Good morning, I just follow up on on Boses question can you maybe give us some color I think it will be in the queue later, but can.
Can you talk about where the asset marks in liability marks are today versus year end.
Yeah sure Steven I think if you take a look at the press release, maybe one way to look at it obviously this quarter was really good.
In terms of recovery in book value, but on a year to date basis, we haven't completely retraced our remarks.
So.
If you take a look at at our earnings statements.
Through the nine months were still down about 172 million now the the asset mix has changed a little bit, but you know that's a material amount I guess they'll come back and add to book value you get closer to the <unk>.
The numbers that I was mentioning earlier today.
Great and I appreciate the color there and quantifying that you know when we look at the the shift in agency assets, you know declined sequentially, but but it's all a corresponding in the a pretty sizable increase in asset yield you know can you talk about what you're seeing there and kind of the you know when did that.
Ah portfolio shift change and I guess leverage was down so how does that impact kind of what the maybe weighted average leverage for the quarter versus what quarter end was as we think about the go forward earnings power of the quarter end balance sheet.
Hey, Stephen this is that money so as far as the agency CMBS portfolio now we've spent the better part of the last six years acquiring those assets and that's gone sort of I won't say, it's vastly different rate environment, but you know.
We did have some lower yielding assets that were also.
Effectively term fransen reluctance on NIM relative to the hedges we have put in place. So those asset sales that we've done that we contemplate completed in Q3 led to a higher base case yield on would be retained so I think that's that's the change there it's not necessarily the addition of new assets as just selling the lower yielding assets to optimize that but.
Folio I think you know we will continue to monitor.
Where those assets trade relative all protection, that's better than these securities. So with as you know we have no hedges onto it's also a good way for us to manage the duration of that portfolio given that it is a longer duration assets outright. So if rates remain here in the price action is pretty strong and there's a lot of demand.
Both from the Investor base as well as the fed that we would continue to take advantages of that.
As far as the overall leverage and how to think about that obviously, we've decreased leverage throughout the year and we were at about 1.3 times at the end of Q.
Q3.
I think we're probably going to remain around these levels probably through year end and then as well.
We were a year removed from Cove, Ed the elections are in the rearview mirror, we will see if you want to adjust that back upwards and have allrecipes, earning assets on the books, but relative to our dividend on our core earning her out earning that currently so we don't see a current need to sort of spend the cash.
Great. Thanks for the color really appreciate it.
Once again, if youd like to ask a question. Please press Star One. Your next question comes from Trevor Cranston JMP Securities.
All right. Thanks.
You were talking about the opportunity set for credit investments I guess, one EPS or class you didn't mention was non QM loans.
So I was wondering if you could maybe comment on kind of what you're seeing in terms of supply of newly originated non QM and if that is an asset class that you guys are looking at are you heading into the portfolio. Thanks.
Sure Hey, Trevor Yes, that's the asset class we spent.
A lot of time looking out over the last 18 months.
You know gladly, we missed some of the hiccups experienced in that class in Q1, and Q2 and as a result of those pick ups I think origination volumes had gone down quite significantly with a lot of originators, so effectively turning off that.
Bob sort of.
Well what was available just the financing wasn't their warehouse lines right. There in the securitization market wasn't there.
Has that sort of reverted a lot of the warehouse lines have been cleaned up originations are picking back up as our warehouse line availability for those products. So again, we will evaluate those relative to the other.
Loans that were focused on primarily being season re performing agency eligible investor loans and see how the returns on the equity pieces compare relative to the non QM space.
You've had a lot of in depth discussions over 18 months with different originators and potential partners to source that collateral, but like I said, it's just in relation to other opportunities available to us.
Okay great.
And then you know obviously you guys had a strong book value number in Threeq you can you comment on what you're seeing in terms of credit spread so for fourth quarter and how that's impacted books all your order today.
Sure I would say credit spreads are unchanged as we from September thirtyth through.
November 1st here, I think with the uncertainty around the election that sort of kept spreads in check.
As we get some more clarity in the coming days to weeks on that you know I think spreads will grind tighter.
We feel that ready space hasn't had the same sponsorship as all the other spread products from the fed. So I think it's still offers on a relative basis higher returns and that should continue to sort of grind spreads and tighter in the near term.
He has beneficial for our assets and book value.
Got it okay. Thank you thank.
Thank you.
Your next question comes from the line of Lee Cooperman of Omega family Office [noise].
Thank you and just really three questions.
What is the fully diluted share count now assuming you know any due to the dilutive securities below $10, let's say.
She did a lot of financing at a difficult time, but the <unk> what does the shares fully diluted share count that we should be looked good that's question number one.
Sure it fully diluted is 265 million.
I didn't hear your two to 65 or 365.
265 got you Okay. The 1.3 or you know recourse leverage I think you addressed it a moment ago, but that's what level, you're comfortable that and you might take it up sometime next year, depending upon circumstances, where you want to keep it at that level.
Hey, Lee now I think we're comfortable with that heading into year end and I think to the extent that everything.
Everything sort of stabilize as we look to pick it up and 2021.
How do you view that $1 billion of a cashier <unk> how much is your minimum cash you need to run the business and how much additional capex you have that you can invest where we could assume some kind of spread.
What I'm trying to figure out is whether your current earnings are below normalized earnings because you have one employee cash.
Well I mean, we're levered.
Company, we always try to keep the cash holdings to a minimum I mean, thats really about under under Levered assets on the balance sheet and I think you know we're looking at the business right. Now is that we have ample liquidity I think as most that we have an election today that I think can go on for another couple of days here.
Or maybe even longer there's some uncertainty there I think we are.
You know cautious about year end and I think just as is what we've been through this year I think it makes sense for the company to husband some of its cash and keep itself in the lower of gearing or going into year end and when things kind of settle out we can pick up a take up leverage and.
I think we're just trying to be prudent given given where we've seen in the volatility in the markets and.
And I think I think it makes sense at least for the next.
Two months or so just to be in a in a much more conservative posture I agree. It makes sense you talk about the election results in the next few days do we have a bias in terms of that I mean personally but in terms of that business do we care about the outcome I mean, it seems to me the most the best the most important thing that came out of the election results does.
<unk> is a repudiation of the left.
Yeah, I think the best thing that happen I mean first of all I mean, the housing market is screaming and I think that's great for for our portfolio and for the credit of our portfolio. So that's that's terrific I don't think that's going to change with the election results.
And I think you know regardless of what happens in the presidential election. It looks like the Senate is going to be very close maybe stay Republican which I think is a divided government is probably not a bad thing for for a report that for the markets.
My own two cents is I'd be very careful I mean, somebody's going to wake up one day, so who pays for the party when the parties over it.
244 years to go from no national debt to 21 trillion, that's going up 15, 20% a year, it's not sustainable somebody they have to wake up so I'd be careful but good good luck guys.
Thank you.
At this time there are no further questions I will now we're trying to call from Atlanta Biasi for any additional or closing comments.
Well. Thank you for participating in the third quarter 2020 earnings call for primary investment Corp, and we look forward to speaking to you early next year.
Thank you for participating in today's conference call. You May now disconnect your lines and have a wonderful day.
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