CHIMERA INVESTMENT CORP. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Chimera is an internally managed mortgage REIT investing primarily in residential mortgage loans, Non-Agency RMBS, and Agency MBS. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2021 / June 30, 2021 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $252.7 million | $245.9 million in Q2 2020 |
| Net interest income | $172.1 million | $116.7 million in Q2 2020 |
| Net income | $163.3 million; $0.63 basic and $0.60 diluted EPS available to common shareholders | Net loss of $55.0 million in Q2 2020 |
| Six-month net income | $320.9 million; $1.23 basic and $1.14 diluted EPS available to common shareholders | Net loss of $425.7 million in first-half 2020 |
| Cash and cash equivalents | $347.0 million | $269.1 million at December 31, 2020 |
| Total assets / stockholders’ equity | $15.86 billion / $3.63 billion | $17.52 billion / $3.78 billion at December 31, 2020 |
| Interest-bearing debt | $12.05 billion; GAAP leverage 3.3:1 and recourse leverage 1.0:1 | $13.51 billion; 3.6:1 and 1.2:1, respectively, at December 31, 2020 |
| Operating cash flow | $259.5 million for the six months | $18.1 million in first-half 2020 |
| Economic net interest spread / margin | 4.4% / 4.8% in Q2 | 2.4% / 2.8% in Q2 2020 |
| Book value per common share | $11.45 | $12.36 at December 31, 2020 |
Net interest income is the principal recurring earnings source. Economic net interest income and spread are non-GAAP measures as defined by the company; they should not be treated as substitutes for GAAP results.
Material changes and key drivers
- Q2 common earnings improved from a loss to a profit, supported by lower funding costs and higher fair values. Q2 included $36.1 million of unrealized gains on financial instruments at fair value, versus $171.9 million of losses in Q2 2020. First-half 2021 included $306.1 million of such gains, compared with $432.8 million of losses in first-half 2020.
- First-half 2021 net income also benefited from the absence of the $304.1 million net derivative loss reported in first-half 2020. Chimera held no derivative instruments at June 30, 2021.
- Interest expense fell 38% to $80.6 million in Q2 and 30% to $188.7 million for the first half, reflecting lower funding rates, reduced average borrowings, and refinancing of higher-cost securitized debt.
- First-half interest income declined 9% to $495.8 million as average interest-earning assets fell to $14.9 billion from $20.2 billion in the prior-year period. Portfolio sales and reductions were partly offset by prepayment penalties and early paydowns.
- Debt extinguishment losses were $21.8 million in Q2 and $258.9 million for the first half, principally from acquiring loan-backed securitized debt above its carrying value. These costs partly offset earnings gains.
- Management called and replaced securitizations with lower-cost financing. It estimated funding-cost savings of about 200 basis points on the April transactions and 180 basis points on the June transaction. The company also reported that higher advance rates added liquidity.
- Portfolio fair value at June 30 was concentrated in loans held for investment ($12.15 billion) and Non-Agency RMBS ($1.92 billion); Agency MBS totaled $1.31 billion. Total assets and secured financing balances decreased from year-end.
Cash flow, capital, and liquidity
For the six months, investing activities provided $1.67 billion, while financing activities used $1.85 billion; cash increased by $77.9 million. Financing cash uses included net repayments of secured financing, repayment of securitized debt, $220.9 million to settle warrants, and $176.1 million of common and preferred dividends. Cash generation from investing included loan sales and principal repayments, offset by investment purchases.
Secured financing agreements were $3.55 billion at June 30, down from $4.64 billion at year-end. The company reported $592 million of unused, uncommitted warehouse capacity and compliance with financing covenants. It stated that current assets, leverage, and borrowing arrangements should cover anticipated short-term liquidity needs, while warning that funding renewals, haircuts, and collateral calls depend on market conditions. Approximately $1.4 billion of secured financing was not subject to additional margin requirements from collateral-value declines; a further $121 million had a threshold before such requirements applied.
The company declared common dividends of $0.33 per share for Q2 and $0.63 per share for the first half. The board authorized a $250 million repurchase program; approximately $226 million remained available at June 30. No shares were repurchased in Q2. About $353 million of the 7.0% convertible notes had converted into approximately 54 million common shares; $21 million principal remained outstanding at June 30. The filing reports book value per share of $11.45, down from $12.36, citing factors including warrant settlement and note conversions.
Outlook, risks, and unusual items
- Management described improving financial markets, housing fundamentals, and loan delinquency trends, but gave no quantitative earnings, dividend, or book-value guidance.
- Management cited ongoing uncertainty from COVID-19 and the Delta variant, including possible effects on mortgage credit, markets, operations, liquidity, and financing access. The company had operated remotely since March 2020 and reported limited operational impact to date.
- Interest-rate, spread, prepayment, extension, credit, and real-estate risks could affect income, fair values, and funding. The company had no interest-rate hedges at quarter-end. Its modeled instantaneous +100-basis-point scenario indicated a 5.48% decrease in annual net interest income and a 5.57% decrease in asset market value; management cautioned that actual results could differ materially.
- Many mortgage assets and borrowings were linked to LIBOR. The company said transition to replacement reference rates could create basis, hedging, and operational challenges; no contracts had yet been modified for reference-rate reform.
- Significant holdings are valued using models and unobservable Level 3 inputs. For 10 securities, internal prices were $8 million above third-party prices in aggregate; after review, the company retained its higher valuations. Loan valuations also involve substantial management judgment.
- Credit exposures include seasoned residential loans and Non-Agency RMBS. At June 30, 16.7% of the residential loan unpaid principal balance was delinquent, in bankruptcy, foreclosure, or REO; the comparable year-end measure was 18.6%. Adverse credit trends or forced asset sales could harm results and liquidity.
- In a subsequent event, the company exercised a call option to retire $188 million unpaid principal amount of loan-backed securitized debt at par. The filing reported no legal proceedings and no material changes to the risk factors in its 2020 Form 10-K.
Most important facts for investors to verify
- Whether recurring net interest income and core earnings can be sustained without relying on fair-value gains, prepayment penalties, or debt-restructuring activity.
- How much of the $258.9 million first-half debt extinguishment loss was one-time, and the realized funding savings and liquidity benefits from the new securitizations.
- Current book value per share and the effects of further convertible-note conversions, warrant settlement, dividends, and potential repurchases on per-share value.
- Exposure to refinancing and margin calls, particularly given short maturities in parts of secured funding and the company’s lack of interest-rate hedges.
- Credit performance and valuation assumptions for the large loan and Non-Agency RMBS portfolios, including delinquency trends and Level 3 model inputs.
- Whether declared distributions remain supportable from REIT taxable income and available liquidity; the filing does not provide forward dividend guidance.