Business Context and Reporting Period
Company: Chimera Investment Corporation (Chimera)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Chimera is a specialty finance company and Real Estate Investment Trust (REIT) that invests primarily in residential mortgage-backed securities (RMBS), including non-Agency and Agency securities, as well as securitized 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 | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Income (Loss) | $158.0 million | ($107.6 million) | $228.5 million | ($128.6 million) |
| Net Income Per Share | $0.24 | ($2.76) | $0.51 | ($3.30) |
| Net Interest Income | $95.5 million | $7.9 million | $171.2 million | $32.0 million |
| Total Assets | $4.37 billion | $1.48 billion (Dec 31, 2008) | - | - |
| Total Liabilities | $2.18 billion | $1.06 billion (Dec 31, 2008) | - | - |
| Stockholders' Equity | $2.19 billion | $0.41 billion (Dec 31, 2008) | - | - |
| Cash and Cash Equivalents | $21.0 million | $27.5 million (Dec 31, 2008) | - | - |
| Debt-to-Equity Ratio | 0.9:1 | 4.6:1 (Q3 2008) | - | - |
| Annualized Yield on Assets | 7.71% | 5.35% | 7.20% | 6.03% |
| Annualized Cost of Funds | 1.67% | 4.64% | 2.29% | 4.82% |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $158.0 million for Q3 2009, a significant improvement from a net loss of $107.6 million in Q3 2008. This reversal was driven primarily by realized gains on the sale of investments ($74.5 million in Q3 2009 vs. $113.1 million in losses in Q3 2008) and increased net interest income.
- Portfolio Expansion: Total assets grew from $1.48 billion at year-end 2008 to $4.37 billion at September 30, 2009. This expansion was funded by two major secondary equity offerings in 2009, raising approximately $1.46 billion in net proceeds.
- Asset Composition: The portfolio shifted significantly. Non-Agency RMBS fair value increased from $613 million to $2.0 billion, and Agency RMBS increased from $242 million to $1.8 billion. Conversely, securitized loans held for investment decreased from $583 million to $499 million.
- Financing Costs: The annualized cost of funds dropped dramatically from 4.64% in Q3 2008 to 1.67% in Q3 2009, reflecting lower market interest rates and the termination of certain interest rate swaps.
- Impairments: The company recorded $2.2 million in other-than-temporary impairment (OTTI) losses in Q3 2009, compared to zero in Q3 2008. This was attributed to credit impairments on ten subordinate non-Agency securities.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the improved results to the successful deployment of capital from secondary offerings into higher-yielding assets and a favorable decline in borrowing costs. The company executed two significant re-securitization transactions in Q3 2009 (JPMRT 2009-7 and CMSC 2009-12R), realizing gains of approximately $66.7 million combined.
Outlook: The company expects to continue leveraging repurchase agreements and securitizations to fund investments. Management anticipates that results will depend on net interest income, asset market values, and the supply/demand for assets. They intend to maintain REIT status by distributing at least 90% of taxable income.
Risks and Contingencies:
- Market Liquidity: The filing notes that the non-Agency RMBS market remains illiquid, making it difficult to obtain third-party pricing and potentially leading to greater price volatility.
- Interest Rate Risk: The company faces risks from mismatches between asset yields and borrowing costs. Rising rates could increase borrowing costs faster than asset yields reset, particularly for fixed-rate assets funded with floating-rate debt.
- Credit Risk: The company retains credit risk on non-Agency RMBS and securitized loans. While underwriting standards are strict, delinquencies and defaults could increase in a deteriorating economic environment.
- Government Programs: The impact of government initiatives (TARP, TALF, PPIP) on the mortgage market remains uncertain, though they are intended to support liquidity.
Key Facts for Investor Verification
- Equity Dilution: Verify the impact of the significant increase in shares outstanding (from ~177 million at Dec 31, 2008 to ~670 million at Sept 30, 2009) on future per-share earnings.
- Realized Gains Sustainability: Assess whether the $74.5 million in realized gains from asset sales in Q3 2009 is a recurring revenue stream or a one-time event driven by specific re-securitization transactions.
- Non-Agency RMBS Valuation: Review the fair value methodology for the $2.0 billion non-Agency RMBS portfolio, noting that internal valuations were 0.78% higher than aggregated dealer marks due to market illiquidity.
- Dividend Coverage: Confirm that the company's taxable income (which differs from GAAP net income) is sufficient to support the declared dividends of $0.12 per share for the quarter and maintain REIT qualification.
- Re-securitization Retained Interests: Examine the risk profile of the subordinated bonds and owner trust certificates retained by the company in the JPMRT and CMSC re-securitization deals, which provide credit support to the sold AAA-rated bonds.