Chimera Investment Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017, and operating results are compared with Q1 2017. Chimera is a leveraged mortgage REIT investing in residential mortgage loans and Agency and Non-Agency mortgage-backed securities. It reported as a REIT.
Financial performance and condition
| Metric | Q1 2018 / Mar. 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $297.1 million | $251.3 million in Q1 2017 |
| Interest expense | $149.3 million | $110.2 million in Q1 2017 |
| Net interest income | $147.9 million | $141.1 million in Q1 2017 |
| Net income | $239.0 million | $162.8 million in Q1 2017 |
| Net income available to common shareholders; diluted EPS | $229.6 million; $1.22 | $157.5 million; $0.84 in Q1 2017 |
| Core earnings, a non-GAAP measure; per basic share | $108.8 million; $0.58 | $96.0 million; $0.51 in Q1 2017 |
| Operating cash flow | $198.5 million | $61.2 million in Q1 2017 |
| Cash and cash equivalents | $100.8 million | $63.6 million at Dec. 31, 2017 |
| Total assets; stockholders’ equity | $21.33 billion; $3.67 billion | $21.22 billion; $3.63 billion at Dec. 31, 2017 |
| Debt; GAAP leverage | $16.72 billion; 4.6:1 | $16.84 billion; 4.6:1 at Dec. 31, 2017 |
| Book value per common share | $17.12 | $16.85 at Dec. 31, 2017 |
| Common dividend declared per share | $0.50 | $0.50 in Q1 2017 |
Q1 cash flow from investing was positive $63.2 million; financing used $224.5 million. The economic net interest spread, a non-GAAP measure, was 2.5%, versus 3.0% in Q1 2017 and 2.7% in Q4 2017; economic net interest margin was 3.0%, versus 3.6% in Q1 2017. The filing reports economic cost of funds of 3.7% for Q1 2018, up from 3.5% in Q1 2017.
Material changes and management commentary
- Net income available to common shareholders rose $72 million year over year. Management attributed the increase mainly to a $99 million improvement in net derivative gains, lower other-than-temporary impairment losses, and a $10 million gain on extinguishment of debt. These were partly offset by lower unrealized gains on financial instruments at fair value.
- Interest income increased 18%, principally as the portfolio shifted toward residential mortgage loans. Interest expense increased 35%, reflecting larger loan-related financing balances and higher interest rates.
- The portfolio remained primarily residential loans: 66.4% of interest-earning assets at amortized cost, compared with 67.3% at year-end. Agency MBS were 23.5% and Non-Agency RMBS 5.7%.
- Management said rising short-term rates increased financing costs; first-quarter economic net interest expense was 3.7%, and the economic spread narrowed. It also reported a flatter yield curve, higher long-term Treasury yields, and mixed asset-value changes. Loan values increased, while Agency securities lost value, partly offset by hedges.
- Chimera repurchased approximately 883,000 common shares for $14.8 million, at an average $16.81 per share. The board had reauthorized a $100 million repurchase program; approximately $85.2 million remained available at quarter-end.
Outlook, risks and unusual items
- No quantified earnings or dividend guidance is provided. Management intends to pursue high-yielding investments, seek durable dividends, and manage risk while safeguarding book value. It expects to maintain regular quarterly dividends, subject to operating needs and debt service.
- Market risks include interest-rate, credit, prepayment, extension, basis, liquidity, real-estate and counterparty risks. Higher rates may increase floating-rate funding costs faster than asset yields; hedges may not fully offset that effect. Management’s Agency MBS scenario estimates that a parallel 100-basis-point rate rise would reduce annual economic net interest income by 11.28% and portfolio value by 2.25%, including hedges. Actual outcomes may differ materially.
- Residential loans had a 16.9% unpaid-principal delinquency or distressed-status rate at March 31, up from 16.1% at year-end. Non-Agency RMBS credit quality is concentrated: 58.2% was rated below B and 34.3% was unrated.
- Repurchase agreements totaled $7.20 billion and generally reprice with LIBOR. Their weighted-average remaining maturities were 32 days for Agency collateral and 90 days for Non-Agency MBS and loans. A decline in collateral value can trigger margin calls or require asset sales. Credit Suisse represented 12% of equity in reported repo exposure; management reported no other counterparty exposure above 10% of equity.
- Substantial assets and liabilities are Level 3 fair-value measurements, dependent on management assumptions. At quarter-end, internally modeled values were below third-party prices by $6 million for certain securities and $23 million for loan pools; management adopted the lower internal values.
- Unusual items included a $9.7 million gain from repurchasing $149 million amortized-cost loan-backed securitized debt for $139 million, and $94.5 million of net derivative gains, largely unrealized. Q1 other-than-temporary credit impairment losses were $1.2 million, versus $18.7 million in Q1 2017.
- Consolidated securitization VIEs had $14.9 billion of assets and $9.6 billion of liabilities; those assets are restricted to the VIEs and the liabilities are non-recourse to Chimera. The company reported ordinary-course legal matters and potential repurchase obligations for breaches of representations and warranties in certain resecuritizations; no amount is specified here. No material changes to the prior 10-K risk factors and no subsequent events were reported.
Important facts for investors to verify
- Assess how much reported earnings depended on derivative marks and debt-extinguishment gains versus recurring core earnings and net interest income.
- Review the trajectory of funding costs, spreads, and short-term repo maturities as rates change, including collateral and margin-call sensitivity.
- Examine loan delinquency trends, credit assumptions, Level 3 valuations, and the high below-B/unrated share of Non-Agency RMBS.
- Confirm dividend coverage using taxable income and cash generation; GAAP earnings, core earnings, and REIT taxable income are not interchangeable.
- Distinguish recourse repo borrowing from non-recourse securitized debt and consider the restrictions on consolidated VIE assets.