Chimera Investment Corp. 10-Q Summary (Q2 2008)
Business Context and Reporting Period
Chimera Investment Corporation (Chimera) is a specialty finance company and Real Estate Investment Trust (REIT) organized in Maryland. The company invests in residential mortgage loans, mortgage-backed securities (RMBS), and other asset classes. This report covers the quarterly period ended June 30, 2008. Chimera commenced operations in November 2007 and is externally managed by Fixed Income Discount Advisory Company (FIDAC), a subsidiary of Annaly Capital Management, Inc.
Key Financial Metrics
| Metric | Q2 2008 (Quarter) | YTD 2008 (Six Months) | Dec 31, 2007 (Prior Year End) |
|---|---|---|---|
| Net Income (Loss) | $33.9 million | ($21.0 million) | N/A |
| Net Income (Loss) Per Share | $0.87 | ($0.54) | N/A |
| Total Assets | $1.97 billion | - | $1.57 billion |
| Total Liabilities | $1.58 billion | - | $1.03 billion |
| Stockholders' Equity | $387.7 million | - | $538.9 million |
| Cash and Cash Equivalents | $49.9 million | - | $6.0 million |
| Net Interest Income | $9.9 million | $24.1 million | N/A |
| Debt-to-Equity Ratio | 3.6:1 | - | 0.5:1 |
Portfolio Composition (June 30, 2008): RMBS ($1.12 billion), Loans held for investment ($150.1 million), and Securitized loans ($613.6 million).
Material Changes vs. Prior Period
- Profitability Volatility: The company reported a net income of $33.9 million for Q2 2008, contrasting with a net loss of $21.0 million for the six months ended June 30, 2008. The Q2 profit was driven primarily by a $25.6 million unrealized gain on interest rate swaps, offsetting a $31.2 million realized loss on investment sales incurred in Q1.
- Equity Decline: Stockholders' equity decreased from $538.9 million at year-end 2007 to $387.7 million at June 30, 2008. This reduction is largely due to a $105.0 million unrealized loss on available-for-sale securities recorded in Other Comprehensive Loss.
- Leverage Increase: Leverage increased significantly from 0.5:1 at December 31, 2007, to 3.6:1 at June 30, 2008, reflecting portfolio expansion and increased reliance on repurchase agreements.
- Financing Structure: The company completed a $619.7 million securitization transaction in Q2, resulting in $504.4 million of securitized debt. Additionally, repurchase agreements increased from $270.6 million to $909.1 million.
Outlook, Risks, and Management Commentary
- Market Conditions: Management highlights severe dislocation in the non-Agency mortgage sector and credit markets. Liquidity constraints have made short-term financing difficult and expensive, forcing the company to terminate unused whole loan repurchase facilities to avoid fees.
- Liquidity Strategy: To mitigate liquidity risks, Chimera has secured long-term financing through securitization and increased reliance on a repurchase agreement with Annaly Capital Management. As of August 6, 2008, $606 million (48% of total financing) was outstanding under the Annaly agreement.
- Asset Valuation: The company holds $1.12 billion in RMBS with gross unrealized losses of $105.0 million. Management asserts these losses are due to market conditions rather than credit quality, as all securities are "AAA" rated or carry an implied "AAA" rating. No other-than-temporary impairments were recognized.
- Dividends: A quarterly dividend of $0.16 per share was declared for Q2 2008. The company intends to maintain REIT status by distributing at least 90% of taxable income.
- Risks: Key risks include the inability to refinance debt, forced asset sales at depressed prices due to margin calls, and potential credit losses in the mortgage market. The company notes that if major market participants fail, it could negatively impact asset values and net book value.
Investor Verification Checklist
- Financing Concentration: Verify the stability of the $606 million financing line with Annaly Capital Management, which represents nearly half of the company's total financing.
- Unrealized Losses: Assess the sustainability of the $105 million unrealized loss on RMBS and the potential for these to become realized losses if market conditions deteriorate further.
- Liquidity Covenants: Review the amended covenants on whole loan repurchase agreements and the company's ability to meet margin requirements without forced asset sales.
- Dividend Coverage: Confirm that net interest income and realized gains are sufficient to cover the $0.16 per share dividend in future quarters, given the volatility in swap gains.
- Asset Quality: Monitor the allowance for loan losses, which increased to $1.2 million ($546k for loans + $698k for securitized loans) as of June 30, 2008.