Chimera Investment Corporation — Q1 2021 Form 10-Q
Reporting period: Quarter ended March 31, 2021. Chimera is a mortgage REIT investing primarily in residential mortgage loans, Non-Agency RMBS, and Agency mortgage-backed securities. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / December 31, 2020 |
|---|---|---|
| Interest income | $243.1 | $300.3 in Q1 2020 |
| Interest expense | $108.1 | $142.1 in Q1 2020 |
| Net interest income | $135.1 | $158.2 in Q1 2020 |
| Net income (loss) | $157.6 | $(370.8) in Q1 2020 |
| Net income (loss) available to common shareholders | $139.2; basic EPS $0.60, diluted EPS $0.54 | $(389.2); EPS $(2.08) in Q1 2020 |
| Economic net interest income (non-GAAP) | $136.1 | $150.5 in Q1 2020 |
| Economic net interest spread / margin | 3.1% / 3.6% | 2.3% / 2.7% in Q1 2020 |
| Core earnings (non-GAAP) | $86.5; $0.36 per adjusted diluted share | $105.9; $0.56 per adjusted diluted share in Q1 2020 |
| Total assets / stockholders’ equity | $16,699.3 / $3,566.5 | $17,523.0 / $3,779.4 at Dec. 31, 2020 |
| Cash and cash equivalents | $317.5 | $269.1 at Dec. 31, 2020 |
| Total liabilities / interest-bearing debt | $13,132.8 / approximately $12,939.4 | $13,743.6 / approximately $13,513.6 at Dec. 31, 2020 |
- Net cash provided by operating activities was $122.2, compared with cash used of $419.5 in Q1 2020. Investing activities provided $814.2, versus $6,645.5 in Q1 2020; financing activities used $888.0, versus $6,074.5.
- Cash increased by $48.4 during the quarter. Period-end GAAP leverage was 3.6:1, unchanged from year-end; recourse leverage declined to 1.1:1 from 1.2:1.
- Loans held for investment were $12,808.0, Non-Agency RMBS $2,013.5, Agency CMBS $1,355.3, and Agency RMBS $86.4 at quarter-end. Loans represented about 79% of the investment portfolio by fair value.
- Book value per common share was $11.44, down from $12.36 at year-end 2020. Comprehensive income available to common shareholders was $74.7, including a $64.4 decline in other comprehensive income.
Material changes and management commentary
- Compared with Q1 2020, interest income fell 19% and net interest income declined $23.1, primarily reflecting the smaller average interest-earning asset base after portfolio reductions. Interest expense declined 24%, reflecting lower balances and funding costs.
- The return to GAAP profitability chiefly reflected $270.0 of unrealized gains on financial instruments at fair value, compared with $260.9 of unrealized losses in Q1 2020. Net interest income was $135.1; these gains were partly offset by reported debt-extinguishment losses of $237.1.
- Core earnings fell to $86.5 from $105.9, which management attributed primarily to lower interest income from reduced average earning assets and a higher diluted-share denominator.
- Management reported calling and replacing higher-cost securitizations with new securitizations at lower rates. It estimated funding-cost savings of approximately 300 basis points on February transactions and 200 basis points on March transactions, and said higher advance rates also improved liquidity.
- During Q1, the Company acquired loan-backed securitized debt with an amortized-cost balance of $2.7 billion for approximately $2.9 billion. The filing reports a $237.1 loss on extinguishment in the statements and describes a $234 million net loss in the notes and discussion.
Outlook, risks, and unusual items
- The filing provides no specific earnings or dividend guidance. Management said it believed current assets, leverage, and borrowing arrangements were sufficient for anticipated short-term liquidity needs, while warning that this assessment depends on market conditions and financing access.
- Management described recovering financial markets, strong housing fundamentals, and continued uncertainty from COVID-19. It cautioned that worsening economic conditions could affect borrower payments, asset values, liquidity, and access to financing.
- Interest-rate and funding risks are significant. The Company had no interest-rate hedges at March 31, 2021. Its sensitivity analysis estimated that a parallel 100-basis-point rate increase would reduce annual economic net interest income by 7.33% and portfolio market value by 6.39%; actual results could differ materially.
- Short-term secured financing exposes the Company to refinancing, haircut, collateral, and margin-call risks. Approximately $2.94 billion of secured financing agreements was scheduled within one year; some collateral arrangements require additional margin if asset values fall. The Company reported compliance with financing covenants and $323 million of unused uncommitted warehouse facilities.
- Credit quality remains a key risk: 19.4% of the residential loan portfolio’s unpaid principal balance was delinquent, in bankruptcy, foreclosure, or REO at March 31, versus 18.6% at year-end. For Non-Agency RMBS collateral, the corresponding reported total was 16.7%, versus 16.3%.
- Fair values for significant assets and liabilities rely on Level 3 models and judgment. For loan pools, internally developed values were $128 million above third-party prices for five pools flagged for review; management affirmed the higher values. COVID-19, prepayments, credit losses, LIBOR transition, and counterparty exposure are additional risks.
- The Company paid $220 million to settle 20 million warrant shares in cash. It declared common dividends of $0.30 per share for the quarter, compared with $0.50 in Q1 2020, and expanded its share-repurchase authorization to $250 million. A subsequent event was the exercise of a call to retire $682 million of loan-backed securitized debt at par.
- The filing reports no material legal proceedings, no material changes to the risk factors in the 2020 Form 10-K, and effective disclosure controls.
Important facts for investors to verify
- Reconcile the $237.1 million statement-of-operations debt-extinguishment loss with the $234 million figure described in the notes and MD&A, including the transaction’s full accounting components.
- Assess whether reported fair-value gains, including model-based Level 3 valuations, are sustainable and how sensitive they are to credit, prepayment, and discount-rate assumptions.
- Monitor loan delinquencies, realized credit losses, and the effects of COVID-19 and borrower assistance programs on collections and collateral values.
- Review the maturity and renewal profile of secured financing, collateral haircuts, counterparty concentration, and the Company’s ability to maintain liquidity without hedges.
- Evaluate the sustainability of common dividends against core earnings, taxable income, required REIT distributions, and the decline in book value per share.