CHIMERA INVESTMENT CORP - 10-Q Summary (Q1 2009)
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2009. Chimera Investment Corporation is a specialty finance company and Real Estate Investment Trust (REIT) that invests primarily in residential mortgage-backed securities (RMBS) and residential mortgage loans. The company is externally managed by Fixed Income Discount Advisory Company (FIDAC), a subsidiary of Annaly Capital Management, Inc.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Income (Loss) | $18.9 million | ($54.9 million) |
| Net Income Per Share | $0.11 | ($1.46) |
| Net Interest Income | $19.0 million | $14.2 million |
| Total Assets | $1.68 billion | $1.48 billion (Dec 2008) |
| Total Liabilities | $1.24 billion | $1.06 billion (Dec 2008) |
| Stockholders' Equity | $432.8 million | $414.5 million (Dec 2008) |
| Cash and Equivalents | $12.2 million | $27.5 million (Dec 2008) |
| Debt-to-Equity Ratio | 2.4:1 | 2.5:1 (Dec 2008) |
| Net Interest Spread | 2.96% | 2.40% |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $18.9 million in Q1 2009, a significant improvement from a net loss of $54.9 million in Q1 2008. The prior year loss was driven by $32.8 million in realized losses on asset sales and $31.5 million in unrealized losses on interest rate swaps.
- Realized Gains: In Q1 2009, the company sold RMBS with a carrying value of $544.8 million, generating a realized gain of $3.6 million.
- Cost of Funds: Interest expense decreased to $9.0 million from $14.0 million year-over-year. The annualized cost of funds dropped to 3.48% from 4.23%, attributed to lower borrowing rates and the termination of interest rate swaps.
- Portfolio Composition: RMBS fair value increased to $1.09 billion from $855 million at year-end 2008. The portfolio remains weighted toward non-Agency RMBS.
- Dividends: The company declared dividends of $0.06 per share ($10.6 million total) for the quarter.
Outlook, Risks, and Management Commentary
- Capital Raise: Subsequent to the reporting period (April 2009), the company completed a common stock offering raising approximately $851 million in net proceeds. Annaly Capital Management purchased approximately $75 million of these shares.
- Liquidity and Financing: Management notes that credit markets remain challenging. While repurchase agreements are available, terms for non-Agency RMBS financing have tightened. The company relies on cash flows from investments and potential equity offerings to meet liquidity needs.
- Market Risks:
- Interest Rate Risk: Rising rates could increase borrowing costs faster than asset yields reset, narrowing net interest spreads. Falling rates could accelerate prepayments, reducing income on premium assets.
- Credit Risk: The company retains credit risk on non-Agency RMBS and whole loans. An allowance for loan losses of $1.9 million (33 basis points of principal) was established.
- Government Intervention: The conservatorship of Fannie Mae and Freddie Mac, along with programs like TARP, TALF, and PPIP, creates uncertainty regarding future asset valuations and market liquidity.
- Valuation: Investments are valued at fair value. Due to market illiquidity, third-party pricing validation can be difficult, increasing reliance on internal pricing models.
Investor Verification Checklist
- Subsequent Equity Offering: Verify the deployment of the $851 million raised in April 2009 and its impact on leverage and earnings per share.
- Unrealized Losses: Review the $266 million in gross unrealized losses on RMBS to assess potential for other-than-temporary impairment (OTTI) write-downs.
- Financing Terms: Monitor the cost and availability of repurchase agreements, specifically the weighted average borrowing rate (1.78% at period end) and margin requirements.
- Loan Loss Provisions: Track the allowance for loan losses relative to the $566 million securitized loan portfolio, given the economic environment.
- Dividend Sustainability: Confirm that taxable income supports the quarterly dividend policy required for REIT status.