Chimera Investment Corporation — FY2023 Form 10-K
Business context and reporting period
Chimera is a mortgage REIT that uses leverage to invest primarily in residential mortgage loans, alongside Non-Agency and Agency mortgage-backed securities. This summary covers the fiscal year ended December 31, 2023; the filing was signed February 29, 2024. Most year-over-year comparisons are with FY2022.
Financial and operating highlights
| Metric | FY2023 / year-end 2023 | FY2022 / year-end 2022 |
|---|---|---|
| Interest income | $772.9 million | $773.1 million |
| Interest expense | $509.5 million | $333.3 million |
| Net interest income | $263.4 million | $439.8 million |
| GAAP net income (loss) | $126.1 million; $52.4 million available to common shareholders, or $0.23 per diluted share | $(513.1) million; $(586.8) million available to common shareholders, or $(2.51) per diluted share |
| Economic net interest income (non-GAAP) | $270.7 million; net interest spread 1.3%; net interest margin 2.0% | $435.6 million; net interest spread 2.6%; net interest margin 3.2% |
| Earnings available for distribution (non-GAAP) | $119.3 million, or $0.51 per adjusted diluted share | $256.3 million, or $1.08 per adjusted diluted share |
| Cash and cash equivalents | $221.7 million | $264.6 million |
| Operating cash flow | $213.3 million | $325.7 million |
| Total assets / stockholders’ equity | $12.93 billion / $2.56 billion | $13.40 billion / $2.67 billion |
| Debt-to-equity leverage | 4.0:1; recourse leverage 1.0:1 | 4.0:1; recourse leverage 1.3:1 |
| Common dividend declared per share | $0.70 | $1.12 |
At year-end, interest-earning assets were approximately 91% residential mortgage loans, 8% Non-Agency RMBS and 1% Agency MBS by fair value. Total liabilities were $10.37 billion, including $2.43 billion of secured financing agreements and $7.68 billion of securitized debt. Consolidated securitization liabilities are non-recourse, but are included in reported consolidated totals.
Investing activities provided $551.8 million of cash and financing activities used $807.9 million. The company reported $377 million of unencumbered assets available to support financing or liquidity needs. Economic net interest income, spread, margin and earnings available for distribution are non-GAAP measures; the company cautions they are not substitutes for GAAP results or measures of REIT taxable income or dividend capacity.
Material changes versus FY2022
- Net interest income declined by $176.5 million as interest expense rose 53%, while interest income was nearly unchanged. Higher Federal Funds rates increased financing costs and compressed the spread and margin.
- GAAP results improved from a substantial FY2022 loss, mainly because unrealized losses on financial instruments of $736.9 million in 2022 became unrealized gains of $34.4 million in 2023. This improvement did not prevent a decline in earnings available for distribution.
- Book value per common share fell to $6.75 from $7.49. The company reported a FY2023 economic return on book value, including dividends, of -0.53%.
- Cash dividends declared to common shareholders fell to $0.70 per share from $1.12. The quarterly dividend was reduced from $0.23 in Q1 to $0.11 in Q4.
- Secured financing agreements declined by about $1.0 billion, while securitized debt increased by about $498 million. Year-end recourse leverage declined to 1.0:1 from 1.3:1.
- The company purchased $1.4 billion of residential mortgage loans, compared with $1.7 billion in 2022, and sold $344 million of Agency CMBS securities, recognizing a $31.2 million loss. It sponsored $2.6 billion of securitizations, including re-securitizations.
Outlook, commentary and risks
Management expects to continue acquiring and securitizing mortgage loans, pursuing securitization call and refinancing opportunities, and considering additional Agency MBS investments in 2024. It says it is positioned for a “higher-for-longer” rate environment, while identifying possible rate moderation and improved capital markets as opportunities. No specific earnings, dividend, rate or portfolio guidance is provided.
Management said portfolio credit performance in Q4 remained within or better than original expectations. Risks include higher or volatile rates, an inverted yield curve, rising funding costs, margin calls and refinancing access; credit deterioration and geographic concentration; and prepayment, valuation and liquidity uncertainty. Chimera retains subordinated, first-loss interests in securitizations, some of which are difficult to sell or hedge under credit-risk-retention rules. Approximately 97% of recurring fair-value assets and 96% of such liabilities were Level 3 at year-end, relying on significant unobservable inputs.
Other notable items: Chimera realized $41.0 million of derivative losses, including $45 million paid to terminate swaps, and recorded a $11.4 million provision for credit losses. Its largest disclosed secured-financing counterparty exposure was to Nomura: $433 million, stated as 17% of equity. A 100-basis-point parallel rate increase was modeled to reduce projected net interest income by 5.84% and asset market value by 6.55%; actual outcomes may differ. The company reported no material cybersecurity impact and no legal proceedings; it stated that its financial reporting controls were effective. The auditor issued unqualified opinions on the financial statements and internal controls, while identifying valuation of Level 3 instruments and interest-income estimates as critical audit matters.
Important facts for investors to verify
- Track subsequent net interest spread, funding costs and earnings available for distribution against the reduced common dividend; these measures differ from GAAP earnings and taxable income.
- Review liquidity, near-term secured-financing maturities, margin requirements, unencumbered collateral and the concentration of counterparty exposure.
- Assess the assumptions and sensitivity behind Level 3 loan, RMBS and securitized-debt valuations, expected credit losses and reported interest income.
- Monitor loan delinquencies, defaults, recoveries and geographic concentrations, particularly given the portfolio’s seasoned and non-prime collateral and retained first-loss positions.
- Confirm the terms and execution of planned securitizations, refinancing and call activity, and any actual 2024 dividend or capital-allocation decisions.
- Check the filing’s securitization disclosures for internal consistency: one passage says $662 billion of new debt, an amount that appears inconsistent with the surrounding deal information; the filing text does not provide a clear value in that passage.