Q4 2020 Chimera Investment Corp Earnings Call
Ladies and gentlemen, and thank you for standing by welcome.
<unk> investment Corp, fourth quarter, and fiscal year, and 'twenty and 'twenty 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 session.
And would like to ask a question at that time and simply 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.
Ask that while posing your question that you please pick up your handset.
And will sound quality.
Now my pleasure to turn the floor over to Victor Falvo <unk> head of capital markets.
Thank you Lori and thank you everyone for participating and primarily fourth quarter earnings conference call.
Before we begin I'd like to review the Safe Harbor statements.
During this call we will be making forward looking statements, which are predictions projections or other statements about future events.
These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, which are outlined and the risk factor section and 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 and our earnings release, and 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 reconciliation to the most comparable GAAP measures.
Additionally, the content of this conference call may contain time sensitive information that is accurate only as of the date of this earnings call. We do not undertake and specifically disclaim any obligation to update or revise this information.
I will now turn the conference over to our CEO and Chief Investment Officer Mohit Mario.
Thank you Vic.
Good morning, and welcome to the fourth quarter of 2020 earnings call for Chimera Investment Corp.
Joining me on the call today are children, and garlic order, our president and Chief operating officer from.
Rob Colligan, our Chief Financial Officer, and Vic Falvo <unk> head of capital markets.
After my remarks, Rob will review the financial results and then we will open the call for questions.
Before we begin in November we announce and retirement of Matt Lambiase.
And that founded and led Chimera since 2007.
Under his leadership America, two of three $8 billion mortgage REIT and paid more than $5 2 billion and dividends to shareholders.
Matt It was a great leader friend and mentor for everyone and our company.
We want to thank him and we all wish Matt the best of success and its future.
This quarter Humira continued its path of book value appreciation.
And throughout the year, we worked diligently on the liability side of our balance sheet to enhance liquidity and strengthen our cash position.
These actions enabled us to retain our high yielding credit portfolio and benefit from the improvements and asset prices that started in the second half of 2020.
And there is book value improved nearly 4% and the fourth quarter and over 16% since the middle of the year.
This improved book value combined with the Companys dividend policy has generated a 6% economic return for the fourth quarter and a 22% economic return since June 30 of 2020.
The housing market is robust across America.
The Federal reserve has been very supportive of agency mortgage backed securities and open market purchases for its own portfolio.
The feds purchases have helped lenders offer low mortgage rates to homeowners for new home purchases as well as lowering the cost of homeownership for those debt desire to refinance.
The National Association of Realtors recently reported that in December contract closing from existing homes increased to an annualized pace of $6 76 million units.
This is the strongest pace, we've seen since late 2006.
Housing inventories are low demand is strong and mortgage rates are at all time historic.
Start up close.
These are all indicators for continued performance on the housing and residential mortgage credit.
Chimera has a unique and differentiated residential credit portfolio amongst mortgage Reits.
At year, and our GAAP investment portfolio included $12 6 billion mortgage loans and $2 5 billion of non agency RMB, yes.
Over 90% of the loans and non agency securities on our balance sheet were originated prior to 2010.
A strong underlying housing fundamentals and the prospects of a post pandemic economic recovery, we believe our seasoned mortgage portfolio of loans and non agency MBS is uniquely positioned to perform well.
Okay.
The securitization market has demonstrated depth and resiliency and the past year and is a key component of our company's liability management.
Okay.
Spreads on securitized mortgage loans widened as the pandemic began in the spring of 2020.
Subsequently the spreads have ground tighter and closed the year at historically low levels.
Securitization and enables us to finance, our mortgage loans for longer term by transferring them from our loan warehouse and to mortgage trust as we sell senior notes and each deal.
This process helps the company to accomplish and desired asset liability mix, while providing long term non recourse financing.
Yeah.
For the full year, we sponsored seven and re performing loan securitizations.
Two prime Jumbo Securitizations.
Non agency eligible investor loan and securitization and one nonperforming loan and securitization.
And total Chimera sponsored $4 2 billion and 11 separate securitize deals for the calendar year, 2020, and we retained $655 million and subordinate notes.
Securitizations Chimera is primary source of financing for our loan portfolio and as of year and securitize debt represented more than 60% of Chimera liabilities.
We firmly believe that retention of support and the notice from <unk> sponsored deals provides the best Levered returns available and the market.
Secondarily, we utilized repo and other forms of secured financing for warehouse loans and subordinate notes as we seek to enhance our portfolio returns.
Since the onset of the pandemic, we have taken aggressive actions to reduce <unk> financing risk by limiting and strengthening our secured credit facilities.
And here and we have $3 2 billion credit related secured financings, which is 37% less and we're financing at the year end 2019.
The average maturity of our credit related financing is 15 months and $2 billion or roughly two thirds are either non mark to market or limited mark to market.
And April we issued convertible debt.
Concurrent with our offering the company entered into a capped call transaction.
During the fourth quarter of 2020, we exercised a capped call option and the company elected to receive a settlement of approximately $4 7 million shares of our common stock which were then retired.
The retirement of these shares reduces the company's share count benefiting the book value and future returns of our company.
Okay.
Last night, our board of directors increased the size of our outstanding common stock repurchase authorization to $250 million.
This provides a valuable tool for our team as we evaluate the merits of new leverage investment opportunities relative to the potential benefit of stock common stock repurchase.
Our balance sheet is strong and we remain focused on delivering long term value for shareholders.
Now I would like to go through the fourth quarter portfolio activity.
And October we issued CIM 2020 are six with 418 million and re performing loans purchased in September.
The underlying loans on the deal had a weighted average coupon of 525% and a weighted average loan age of 164 months.
The average loan size and the Yardsticks transaction was 102000 and they had an average LTV of 71%.
The average FICO score of the borrower was 638.
We sold $334 million senior securities from the deal and retained $84 million and subordinate notes plus interest only securities.
Our cost of debt for the CIM, 2020, or 6% to 109% with and 80% advance rate.
In November we issued CIM 2020 dash are seven and.
CIM 2020 dash and our one.
Dr. Seven deal consisted of $653 million re performing loans from the called CIM 2017, dash eight and securitization.
The underlying loans and the deal had a weighted average coupon of 638% and a weighted average loan age of 172 months.
The average loan size and the <unk> transaction was 81000 and had an average LTV of 60%.
The average FICO score of the borrowers was 662.
We sold $562 million and securities from the deal and retained $91 million and subordinate notes plus interest only securities.
Our cost of debt for the <unk> deal was two 2% with and 86% advance rate.
The collateral for the and on a one securitization was $132 million of nonperforming loans calls from CIM 2017 Dash eight deal.
The underlying loans had a weighted average coupon of 576% and a weighted average loan age of 170 months.
The average loan size was 100000.
And at an 86, LTV and a $5 89 average FICO.
We sold $84 million notes with a 449% cost of debt and a 64% advance rate.
Chimera retained $48 million of subordinate notes.
VR six or seven and the <unk> deal, we're not weighted by any of the rating agencies.
In December we issued CIM 2022.
Our second prime Jumbo securitization for 2020.
The deal was rated by Moody's and Fitch, and DBS and had $327 million loans with a weighted average coupon of three 9%.
And our weighted average loan age of two months.
The average loan size was 912000 and.
And average FICO of 782, and and average LTV of 64%.
As we begin 2021.
The housing market is booming.
Mortgage portfolio continues to perform well and we have ample cash position to make new investments.
Interest rates are at historic lows and the securitization market is strong with spreads on some classes near all time tights.
This year, we will continue to seek ways to improve upon our lower our liability costs for securitized debt as well as the back and financing of our retained securities from <unk> Securitizations.
As of year and Chimera owns call rights on <unk> 7 billion and 16 previously issued some deals that are either currently callable or will become callable in 2021.
This provides a source of product to meet strong investor demand.
And lastly, our company's Leverages low.
As market conditions improve we can increase our leverage either by growing assets repurchasing equity or both.
Chimera is well positioned as we begin 2021, and we will use all the tools available to deliver the best risk adjusted dividend to our shareholders.
I will now turn the call over to Rob to review the financial results.
And.
Thanks Mohit.
I'll review <unk> financial highlights for the fourth quarter and full year 2020.
GAAP book value at the end of the fourth quarter was $12 36 per share and our.
Economic return on GAAP book value of 6% based on the quarterly change in book value and a fourth quarter dividend per common share.
GAAP net income for the fourth quarter was $129 million or <unk> 49 per share and.
$15 million or <unk> <unk> for the full year.
On a core basis net income for the fourth quarter was 72 million or <unk> 29 per share.
And it was $334 million.
From a $1 46 per share for the full year.
Economic net interest income for the fourth quarter was $117 million.
And it was $513 million for the full year.
For the fourth quarter.
Yield on average interest, earning assets was five 9%.
Our average cost of funds was three 6%.
And our net net interest spread was two 3%.
Total leverage for the fourth quarter was $3 six to one while recourse leverage ended the quarter at one two to one.
For the fourth quarter, our economic net interest and return on equity was 12, 5% and.
And our GAAP return on average equity was 15, 8%.
Expenses for the fourth quarter, excluding servicing fees and transaction expenses were $18 million.
Slightly from last quarter.
That concludes our remarks, and we'll now open the call for questions.
Thank you at this time I would like to remind everyone and you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Bose George of K B W.
Hey, guys. This is actually Mike on for Bose.
So my first question is I was wondering if you could just talk about maybe where you're seeing the best opportunities to deploy capital between our Pls Jumbo investment property.
On last quarter, you mentioned seeds and Rps and is that still the case.
Hey, Mike This is Mike thanks for joining us.
Yes, I mean, our CS and re performing has been the core strategy for the company. Since 2014 is still offer tremendous value and the loan upside from just mitigated losses, given the strong housing fundamentals coupled with how strong the new securitization market is and where you were able to achieve term financing. So we think.
We still think back and.
Pieces that you would retain offer tremendous value.
Okay.
Got you and then I think last quarter, you mentioned that the cash yield on our Pls is still high single digits.
So when I look at some of the recent maybe Fannie RPM sales it looks like everything's pricing above par. So I was just wondering if you can maybe walk through the math to get to that high single digit you noticed that.
On the case.
And then yields on on most things have come in as you just mentioned and alluded to the GSE sales that took place and Q4 spreads have come and quite meaningfully and most of the loan packages and the <unk> space are trading at par or above par.
But at the same time on the new issue side spreads have also come and quite significantly on the rated side you could affect.
Our securitization at the AAA level at 60 basis points, So youre back and returned and that probably represents about 70% on the capital structure and it should go down to the investment grade stack, which probably gets you to and advance rate of 85% if youre on.
Looking at and all in blended execution around mid high one hundreds to swaps on that basis.
So like I said youre back and returns won't be high single digits anymore, probably would be mid high single digits.
All other spread products have come in but with some.
Leverage you could produce double digit returns on that retained piece.
Great. That's helpful and then on the on the business purpose loans can you just maybe talk us through the economics, there and the Matt and Eric with regards to the asset yield and ROE.
And because I just assume that if we're not originating those loans and gain on sale margins are must be pretty high right now.
Yes, so on the business purpose loan funds and our portfolio.
<unk> been focused on go on that portfolio.
200 plus million now.
Given the short duration nature I mean, we have a lot of pay downs on a monthly basis, but the gross coupon on originations is probably just under 9% and net of servicing fees and asset management fees are probably looking at a six little over 6%.
Coupon on a net basis with price execution, just around par or slightly above par. So your levered returns there again are going to be well into the double digits on that product for a relatively short duration assets, replacing the asset is a bigger challenge than sort of the returns offered by it given the short nature.
Duration nature of it.
Great. That's helpful. And then just one more on the buyback you increased the authorization and you can.
And you just remind me what was the previous authorization.
Sure we had 150 before.
Got you and how much is currently available.
So $228 million, we used $22 million last year.
Okay, great. Thank you so much for taking my questions I appreciate it.
Thanks, Mike.
Your next question comes from the line of Doug Harter of Credit Suisse.
Thanks.
Mohit on Rob can you guys walk through kind of what your cost of financing was on the securitization that you did in the quarter can.
Can you just compare that to what the cost of the financing that was being replaced was just to get a sense of update of the <unk>.
Change.
Sure. So hey, Doug This is mohit again.
So the securitization we did four securitizations. The 2020 are six was not a re lever that was just loans. We had acquired at the end of September that we put a weighted towards securitization and early November so and the cost of funding there on a term basis as we said was around $2, 109% the <unk>.
And for that we did was CIM 2017 dash eight.
We say based on the re lever about 100 basis points and cost savings.
We issued debt as I said around two 2% with and $85, 86% advance rate. So prior to the re lever it was over three two or three to five roughly.
Got it and on the deals that you said are either callable today or callable on 'twenty one assuming.
And the securitization markets kind of stay where they are would you expect a comparable amount of savings.
And I'll give you some stats here so of the 16 deals that have become callable debt represents.
Roughly.
$6 billion or $7 billion of UBB.
With current debt, that's associated with debt of $4 $8 billion.
Net debt has a current yield of 427% and as I mentioned earlier, we think and the new issue space right. Now you could issue non rated securitizations somewhere between two to two and a half depending on the collateral profile and the advance rates that youre willing to GAAP, So that's actually going to be.
Bigger number than what we were able to achieve on the.
The 2017 day eight re lever.
That's helpful.
And then you also mentioned that.
And as opportunities present themselves and have the ability to.
To increase your increased leverage.
And you just help size that and kind of how are you. How are you or how we should think about that opportunity.
Yes, I mean, if you if you.
Look at the.
Core focus of the company, which is the CS and re performing space. The Gse's took a pause during the pandemic last year and picked up the pace of selling on the back half of the year.
I think theres still behind schedule and the portfolio has grown as a result of the pandemic. So on the season re performing side. They are still north of a $100 billion of loans and settled needs to be disposed, though from the <unk> <unk>.
Robley between 18% to $22 billion on an annual basis. So thats still a primary source of collateral for us. They're also from funds that will probably liquidate some assets some banks given where pricing has come as we just alluded to a lot of that space is now at pollo and some cases above par.
So again, there is a robust pipeline of loans that will become available for sale today or over the course of 2021 and given the strength of the new issue market and lack of legacy assets available we think spreads there.
We will remain at these levels, which is almost approaching the all time tights.
From from an issuance standpoint, the term financing markets are pretty strong.
The yields have come in on the underlying loans, but on a structural leverage basis, coupled with some limited recourse leverage could still produced double digit returns.
Yeah, Hey, Doug This is Raj, yes, just to add there if you go back a year.
A lot of our thesis our plan for last year was to re securitize reduce funding costs and.
Obviously, COVID-19, pandemic and other things, but a lot of things for many companies on hold.
And we're going into this year.
We have additional.
Deals to re lever and the securitization market is very liquid and the cost is low so I think we're pretty optimistic about 2021.
Great. Thank you.
Our next question comes from the line of Eric Hagen of BPI.
Hey, good morning, a couple of questions can you talk about how your hedge and the MBS portfolio now and any tweaks or additions you've made since year end and maybe just how you like that as a source of liquidity relative to agency pass throughs.
And then on the portfolio of callable securitized debt.
Can you frame just some of the factors that drive the decision to call.
And.
And maybe more importantly, and as you complete incremental deals can you talk about your appetite to lever the retained piece.
Thanks.
And Eric Let me, let me start with the agency MBS question.
So as.
As of Q4, we still had no hedges on that book.
So and we currently have not changed that and Q1 as well even with the market having sold off 25 basis points on the tenure and if you go back to the weighted average coupon on our agency MBS book.
<unk> north of 4% and.
And given how much the market rallied from 2019 to 2020.
Based on the coupon based on the duration of those assets the implied price would be.
Mid high teens, so it'll be where on the 116 to $117 price.
And given the prepay protection, that's exhibited and these assets, but the hard prepay penalty in most cases of 10 years. The prices are sort of artificially kept around that 110 to 112 area, depending on the law and that Youre looking at.
With the market selling off as a debt even in Q4, the price of our agency MBS portfolio was unchanged sort of leading to spread tightening that most other spread products also witness and I think a similar trend as sort of being witnessed in Q1. So far so yes, we have no hedges on at the moment.
We're keeping an eye on what happens to the 10 year, given sort of the duration sensitivity of the portfolio, but we think theres still some spread tightening that could occur within the products. So we think the cost of hedging is not just needed at the moment.
As it will go into your second part of the question on the call and re lever strategy as I mentioned, we have $4 8 billion of debt at a weighted average cost of $4 27%.
And if you look at where we could issue new issued debt that has a big determinant on when and how frequently we would call those deals subject to market conditions of course, and addition to that $4 8 billion of debt relative to the $7 billion of collateral that underpinning it represents roughly a 60.
And 8% advance rate on <unk>.
And based on market conditions, and the performance of that collateral and in addition to reducing the cost of debt. We will also be able to take out equity because we think it will probably be able to sell and effective 80% to 85% advance rates on new securitizations generating more capital to deploy into new attractive investment opportunities.
Right.
And then.
Go ahead, sorry go ahead.
And it's going to be both a cost saving on term financing as well as a potential takeout for equity.
Got it I was hoping maybe you can.
Give us some some thoughts or guidance around your appetite to lever the retained piece.
Uh huh.
As you complete those deals this year.
Sam and I think with where our leverage is at one two times on a recourse basis, coupled with a large cash position that we have and our large unencumbered asset position, we have we're pretty comfortable financing the backend pieces, but.
Unlike prior to the pandemic coming to we're working on strategies to have either non mark to market or limited mark to market on those financings on a go forward basis.
And we were always focused on having the balance sheet on the.
Mark to market basis, but in addition to having committed balance sheet. We also want to focus on making sure that we could finance these with limited mark to market or like I said, our non mark to market basis.
Right and as the market has come in.
And tightened.
Are there any appetite or ability to pay down the line that you got from areas last year.
And essentially refinance it into lower cost non mark to market term funding for the retained pieces.
And I think thats another tool like our focus as it was and the better part of 2020 remains on the liability side.
Both on the Securitizations that we have callable and the cost savings on those coupled with just our repo borrowings I mean, if you go back to December of 19.
And the cost of financing on our credit portfolio was 319% as of the end of Q4 2020. The cost of borrowing is at 5% now obviously and times of crisis borrowing money was expenses, but we borrowed it for a short time and we could have the ability to refinance that so coupled with.
Securitization, you and our repo borrowings have meaningful upside to potential earnings for the company and 2021.
Got it great. Thank you very much for the comments.
Thanks, Eric.
Once again, if you'd like to ask a question. Please press star One. Your next question comes from the line of Trevor Cranston of JMP Securities.
Alright, thanks, and good morning.
First question.
Rob I was hoping maybe you could take us through kind of what the main drivers were of the.
And <unk>.
The decline and core EPS from from last quarter to this quarter and.
And then.
Second question.
And sort of in light of where earnings are and the compression that theres been on new investment spreads can you guys. Maybe just provide some general thoughts around how you guys are thinking about the dividend level two.
2021.
Sure Trevor Thanks for the question.
Going from last quarter to this quarter.
We have had some portfolio pay down, but I think one of the bigger drivers and we may have touched on this and last.
Last quarter's earnings call on the <unk> side, we did have a number of.
And prepayments on on that portfolio, where we received.
Penalties, those GAAP lockouts and.
And some yield maintenance provisions on them. So if they do pay off early we do receive some prepayment penalties. So we had a little bit higher than normal if you looked at the yields on AC MBS and particular last quarter.
They were almost abnormally high.
Versus this quarter you got back to a normal sledding I don't think we have very many if any.
Paydowns, So I'd say last quarter was a little bit higher in that regard versus this quarter.
And then going forward I think we will.
We're looking at it, but obviously have opportunities to reduce.
Some of our liability costs.
And on spread compression, maybe Mo Ken sure Yeah, Yeah.
Second part of your question about how we think about dividend given sort of the compression in yields experienced.
The good thing as we stated in our opening remarks is we have a pool of assets, where we could optimize the financing and as I said, we have $4 8 billion of debt bad.
And our current base of $4, two 7% so to drive and maintain our dividend that cost base is going to go down over 200 basis points. So on and $4 8 billion youre going to save 200 basis points on a go forward basis, We will drive the earnings power of the company for 2021 and beyond and as.
I just alluded to on the recourse repo side on.
And our credit borrowings we are at a cost of funds of five 3% and given how flush that market is with cash that's another source of reducing our cost and driving earnings and 2021 and beyond.
Okay. That's helpful.
And then historically you guys portfolio is.
Paid off quite slowly and I.
I was wondering if you could provide some color around sort of how prepay speeds.
Congrats on over the last several months and.
What the outlook is for that.
Thanks.
Yes.
The uniqueness of our portfolio is just that but I think if you look at our credit portfolio, which is our largest.
Position prepayments or remain flat throughout the pandemic I mean, if you looked at Jan prepayments that were around 910, CPR and and a few forward to Jan 2021 speeds remained consistent around that 9% to 10 CPR basis.
These borrowers have been and the money, but due to the credit impairment and nature of them.
Credit standings, and it just hasnt changed and we don't expect that to change and 2021 either.
Okay, Great I appreciate the comments thank you.
Thank you I will now return the call to Mohit Mario for any closing comments.
Thank you all for joining us on our Q4 earnings call and we look forward to speaking to you on our Q1 earnings flow later, this and May think.
And.
Thank you that does conclude the Chimera investment Corp, Q4, 2020 earnings Conference call you may now disconnect.
And then.
Hi.
And.
Sure.