Chimera Investment Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial statements are unaudited. Chimera is an internally managed mortgage REIT investing primarily in residential mortgage loans, alongside Non-Agency and Agency mortgage-backed securities.
Financial performance and position
| Metric | Q3 2023 / September 30, 2023 | Comparison |
|---|---|---|
| Interest income | $195.6 million | $188.3 million in Q3 2022 |
| Interest expense | $132.2 million | $83.5 million in Q3 2022 |
| Net interest income | $63.4 million | $104.8 million in Q3 2022 |
| Net income (loss) | $2.2 million | $(186.1) million in Q3 2022 |
| Net income (loss) available to common shareholders | $(16.3) million; $(0.07) per share | $(204.6) million; $(0.88) per share in Q3 2022 |
| Economic net interest income | $66.0 million; spread 1.3%; net interest margin 2.0% | $104.2 million in Q3 2022; spread 3.0% and margin 3.5% for the first nine months of 2022 |
| Assets / stockholders’ equity | $12.89 billion / $2.49 billion | $13.40 billion / $2.67 billion at December 31, 2022 |
| Cash and cash equivalents | $138.6 million | $264.6 million at December 31, 2022 |
| Debt and leverage | $10.28 billion interest-bearing liabilities; 4.1:1 GAAP leverage and 1.0:1 recourse leverage | $10.61 billion; 4.0:1 and 1.3:1, respectively, at December 31, 2022 |
| Book value per common share | $6.90 | $7.29 at June 30, 2023 |
For the first nine months, net income available to common shareholders was $40.2 million ($0.17 per share), versus a $665.5 million loss ($2.84 per share) in 2022. Net interest income fell to $198.7 million from $359.4 million, chiefly as financing costs rose: nine-month interest expense increased 69% to $383.0 million. Economic net interest income was $202.4 million, down from $358.7 million; the spread declined to 1.3% from 3.0%.
Cash from operations was $181.9 million, investing activities provided $175.0 million, and financing activities used $482.9 million in the first nine months. Cash declined by $126.0 million. Management reported $467 million of unencumbered assets and $2.1 billion of unused, uncommitted warehouse facilities; availability is subject to lender and market conditions.
Material changes and portfolio developments
- Q3 common-shareholder results shifted from $17.6 million of income in Q2 2023 to a $16.3 million loss. Management attributed the change principally to $44.0 million of unrealized losses on fair-value instruments amid rising yields and market volatility.
- At September 30, loans held for investment were $11.43 billion, about 91% of interest-earning portfolio fair value. Non-Agency RMBS were about 8% and Agency MBS about 1%.
- Secured financing agreements declined to $2.60 billion from $3.43 billion at year-end 2022; securitized debt collateralized by loans increased to $7.60 billion from $7.10 billion. Management said first-nine-month recourse financing exposure fell by $831 million.
- The company purchased $1.3 billion of investments, sold $288 million and received $1.2 billion of principal payments during the first nine months. Q3 purchases included $32 million of residential transition loans and $4 million of Non-Agency bonds.
- The common dividend was $0.18 per share for Q3, versus $0.23 in Q2 and $0.23 in Q3 2022. Nine-month declared common dividends were $0.59 per share, down from $0.89 in 2022. The company repurchased 5.8 million shares for $33 million in the first nine months; no repurchases occurred in Q3.
Outlook, risks and notable items
- Management described a higher-for-longer rate environment, elevated market volatility and financing costs. It emphasized balance-sheet strengthening, liquidity management, lower recourse leverage and longer-term or limited-mark-to-market financing. The filing gives no formal earnings or dividend guidance.
- Management expects investment and financing conditions to remain uncertain and notes that higher rates can pressure funding costs, asset values, spreads and liquidity. Its stated interest-rate sensitivity model estimates that a 100-basis-point rate increase would reduce net interest income by 2.58% and market value by 6.16%; actual results could differ materially.
- Credit-loss provision was $9.0 million for the first nine months, versus $3.2 million in 2022. Management cited higher expected losses and delinquencies in certain Non-Agency RMBS. Residential loan delinquencies, bankruptcy, foreclosure and REO totaled 15.6% of unpaid principal at September 30, versus 17.1% at year-end 2022.
- Fair values for much of the loan portfolio and Non-Agency RMBS rely on Level 3 models and significant estimates. At quarter-end, management affirmed internal prices above third-party pricing for seven loan pools with $2.1 billion in internally valued fair value; internal values were $113 million higher in aggregate than the third-party values. Eight securities also had internal valuations $11 million above third-party values.
- After quarter-end, the company completed a refinancing of an existing high-fixed-rate, non-mark-to-market facility into a two-year limited-mark-to-market variable-rate facility with a rate cap. The filing says this was completed in October 2023.
- The company reported compliance with financing covenants and no expectation of covenant failure in the next 12 months. Consolidated securitization VIE assets are restricted to settling those entities’ obligations, and their debt is non-recourse. The filing reports ordinary-course claims and potential obligations to repurchase securitized assets if representations and warranties are breached; no legal proceedings were listed.
- Management said disclosure controls were effective and there were no material changes to internal control over financial reporting in Q3. It reported no material changes to the risk factors in the 2022 Form 10-K.
Important facts for investors to verify
- Whether higher borrowing costs continue to compress net interest income and affect dividend coverage.
- How fair-value assumptions, especially Level 3 loan valuations and third-party pricing differences, change with market conditions.
- Liquidity and refinancing capacity, including short-term repo maturities, collateral haircuts, margin requirements and counterparty concentration.
- Credit performance of residential loans and Non-Agency RMBS, including delinquencies, defaults, recoveries and credit-loss allowances.
- Book value, common and preferred dividend decisions, and the impact of any further share repurchases or the October refinancing.