Business Context and Reporting Period
Company: Chimera Investment Corporation (Chimera)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: Chimera is a specialty finance company and Real Estate Investment Trust (REIT) that invests primarily in residential mortgage-backed securities (RMBS), residential mortgage loans, and other asset-backed securities. The company is externally managed by Fixed Income Discount Advisory Company (FIDAC), a subsidiary of Annaly Capital Management, Inc. Operations commenced in November 2007.
Key Financial Metrics
| Metric | 2008 (Year Ended Dec 31) | 2007 (Period Nov 21 - Dec 31) |
|---|---|---|
| Total Assets | $1,477.5 million | $1,565.6 million |
| Total Liabilities | $1,063.0 million | $1,026.7 million |
| Shareholders' Equity | $414.5 million | $538.9 million |
| Book Value Per Share | $2.34 | $14.29 |
| Net Interest Income | $44.7 million | $3.1 million |
| Net Loss | ($119.8) million | ($2.9) million |
| Loss Per Share (Basic & Diluted) | ($1.90) | ($0.08) |
| Comprehensive Loss | ($396.6) million | $7.2 million |
| Debt-to-Equity Ratio | 2.5:1 | 0.5:1 |
| Cash and Cash Equivalents | $27.5 million | $6.0 million |
Material Changes vs. Prior Period
- Significant Net Loss: The company reported a net loss of $119.8 million in 2008, a substantial increase from the $2.9 million loss in the partial 2007 period. This was driven primarily by realized losses on asset sales and hedge terminations.
- Realized Losses: To reduce leverage and protect the portfolio, Chimera sold assets with a carrying value of $802.5 million, incurring a realized loss of approximately $144.3 million. Additionally, the company terminated $1.5 billion in notional interest rate swaps, resulting in a loss of $10.3 million.
- Equity Decline: Shareholders' equity decreased by approximately $124.4 million (23%) year-over-year, largely due to the net loss and unrealized losses on available-for-sale securities ($276.8 million in other comprehensive loss).
- Portfolio Composition Shift: The portfolio shifted from holding whole mortgage loans (12.5% of portfolio in 2007) to a mix of RMBS (66.2%) and securitized loans held for investment (33.8%) in 2008. The company securitized $619.7 million of loans in 2008.
- Capital Raising: In October 2008, the company completed a secondary offering raising approximately $301.0 million in proceeds to bolster liquidity.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects to operate with a low level of leverage to support available cash given the severe dislocation in the non-Agency mortgage sector. The company anticipates continued difficulty in obtaining short-term financing on favorable terms. Future results depend heavily on the spread between asset yields and borrowing costs, prepayment speeds, and the ability to maintain REIT status.
Key Risks and Contingencies
- Liquidity and Financing: The company faces significant liquidity risks due to the frozen credit markets. A substantial portion of financing (53% or $562.1 million) is provided by Annaly Capital Management, Inc., a related party. There is no assurance this financing will continue.
- Asset Valuation: A significant portion of the portfolio is classified as "available-for-sale" and marked to fair value. Continued market deterioration could lead to further unrealized losses and potential other-than-temporary impairment charges.
- Margin Calls: Repurchase agreements are subject to margin calls. The company met margin calls in 2008 by obtaining additional funding and selling assets. Further declines in asset values could trigger additional calls.
- REIT Qualification: The company must distribute at least 90% of taxable income to maintain REIT status. Taxable income may differ significantly from GAAP net income due to realized losses not being deductible for tax purposes in the same manner.
Unusual Items
- Management Fee Reduction: In October 2008, the management agreement was amended to reduce the base fee from 1.75% to 1.50% of stockholders' equity and eliminate incentive fees.
- Government Intervention: The filing notes the conservatorship of Fannie Mae and Freddie Mac and the enactment of the Emergency Economic Stabilization Act (TARP), though the impact on the company remains uncertain.
Investor Verification Checklist
- Related Party Financing: Verify the terms and stability of the $562.1 million repurchase agreement with Annaly Capital Management, which represents over half of total financing.
- Asset Valuation Methodology: Review the pricing models and third-party validation used for Level 2 and Level 3 assets, particularly given the illiquidity of non-Agency RMBS.
- Realized vs. Taxable Income: Reconcile the GAAP net loss of $119.8 million against the reported REIT taxable income per share of $0.62 to understand the cash distribution requirements.
- Liquidity Position: Assess the adequacy of the $27.5 million cash balance against potential margin calls and upcoming debt maturities.
- Impairment Analysis: Scrutinize the assessment of "other-than-temporary" impairments for the $274.4 million in gross unrealized losses on RMBS.