Chimera Investment Corporation — Q1 2023 Form 10-Q
Reporting period: Quarter ended March 31, 2023. Chimera is an internally managed mortgage REIT investing primarily in residential mortgage loans and mortgage-backed securities, financed with securitizations, repurchase agreements and other borrowings.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $189.3 million | $202.2 million in Q1 2022 |
| Interest expense | $119.6 million | $64.5 million in Q1 2022 |
| Net interest income | $69.6 million | $137.7 million in Q1 2022 |
| Net income (loss) | $57.4 million; $0.17 per diluted common share | $(262.8) million; $(1.19) per share in Q1 2022 |
| Net income available to common shareholders | $38.9 million | $(281.2) million in Q1 2022 |
| Economic net interest income (non-GAAP) | $69.4 million; 1.4% spread and 2.0% margin | $137.7 million; 3.7% spread and 4.1% margin in Q1 2022 |
| Earnings available for distribution (non-GAAP) | $31.5 million; $0.13 per adjusted diluted share | $93.7 million; $0.39 per share in Q1 2022 |
| Cash from operating activities | $30.4 million | $135.9 million in Q1 2022 |
| Cash and cash equivalents | $232.4 million | $264.6 million at December 31, 2022 |
| Total assets / liabilities / equity | $14.2 billion / $11.6 billion / $2.65 billion | Assets $13.4 billion and equity $2.67 billion at December 31, 2022 |
| Interest-bearing debt and leverage | $10.8 billion; 4.1:1 GAAP leverage and 1.2:1 recourse leverage | 4.0:1 and 1.3:1, respectively, at December 31, 2022 |
Common dividends declared were $0.23 per share, versus $0.33 in Q1 2022; preferred dividends totaled $18.4 million. Book value per common share was $7.41, down from $7.49 at year-end 2022. Management reported a 2% Q1 Economic Return, defined as change in book value per common share plus common dividends.
Material changes and business developments
- Year over year, net interest income fell by $68.1 million as funding costs rose sharply; interest expense increased 86%, while interest income declined 6%. Higher Federal Funds rates, lower prepayment penalties and reduced yields on some securities pressured results.
- Fair-value gains of $64.6 million and the absence of the prior-year’s $370.2 million fair-value loss supported the return to GAAP profitability. These gains were partly offset by $39.9 million of derivative losses and a $5.3 million realized loss on Agency CMBS sales.
- Economic net interest income decreased to $69.4 million from $137.7 million year over year. Earnings available for distribution fell to $31.5 million from $93.7 million, reflecting higher financing costs and lower prepayment-related income.
- Loans held for investment were $12.38 billion, about 90% of interest-earning portfolio fair value. During Q1, the company committed to purchase approximately $1.2 billion of residential loans; about $649 million was expected to settle in Q2.
- Chimera completed three mortgage-loan securitizations with approximately $1.25 billion aggregate principal and terminated four securitizations. It also re-securitized assets to replace Credit Suisse financing; management reported no remaining Credit Suisse exposure. Agency CMBS sales contributed a $5 million loss.
- Secured financing agreements declined to $3.20 billion from $3.43 billion at year-end, while loan-backed securitized debt at fair value increased to $7.51 billion from $7.10 billion. Interest-bearing debt overall rose to $10.8 billion.
Outlook, risks and unusual items
- Management expects short-term rates to remain higher for longer, sees continued uncertainty in rates and credit markets, and identifies recession risk in the second half of 2023. It expects seasoned reperforming loans to be relatively resilient, citing low loan-to-value ratios and loan seasoning.
- The company intends to continue acquiring and securitizing mortgage loans, optimize securitization calls, and consider new investments, share repurchases or reducing higher-cost liabilities. No specific earnings or dividend guidance was provided.
- Liquidity and refinancing are key risks: short-term repo facilities may not renew on acceptable terms, and falling collateral values can trigger margin calls, higher haircuts or asset sales. The company had $427 million of unencumbered assets and $1.8 billion of unused, uncommitted warehouse facilities; covenant compliance was reported at quarter-end.
- Interest-rate, basis, prepayment, extension and credit risks may affect income and asset values; hedges may not fully offset these effects. Management’s modeled parallel-rate sensitivity estimated net interest income down 3.32% and market value down 2.78% for a 50-basis-point increase, and up 4.20% and 3.05%, respectively, for a 50-basis-point decrease.
- Many loans, securities and securitized liabilities rely on Level 3 valuation estimates. At quarter-end, management affirmed certain internally modeled loan-pool values that were $28 million above third-party prices, and certain security values $7 million above third-party prices.
- The allowance for credit losses on available-for-sale securities rose to $10.3 million from $7.2 million at year-end; management attributed the increase to higher expected losses and delinquencies. Residential loan delinquencies, foreclosure, bankruptcy and REO totaled 17.0% of unpaid principal balance, versus 17.1% at year-end.
- LIBOR cessation after June 30, 2023 may require contracts to transition to replacement rates; the filing notes possible operational and financing-cost effects. A subsequent event was the company’s exercise of a call option to retire $210 million of loan-backed securitized debt.
Important facts for investors to verify
- Whether net interest spread and earnings available for distribution stabilize as borrowing costs, rates and prepayment income change.
- How the approximately $649 million of pending loan purchases settle and are financed, and whether planned securitizations proceed on acceptable terms.
- Current margin-call exposure, repo renewal terms, counterparty concentration and availability of committed liquidity; the reported warehouse capacity is uncommitted.
- Performance of residential loans and Non-Agency RMBS, including delinquencies, expected losses and changes to the credit-loss allowance.
- Fair-value assumptions and the gap between internal valuations and third-party prices, particularly for Level 3 assets and securitized debt.
- Common dividend sustainability relative to earnings available for distribution, taxable income, liquidity needs and debt service.