Chimera Investment Corporation — Q1 2011 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2011. Chimera is an externally managed mortgage REIT investing primarily in residential mortgage-backed securities (RMBS) and securitized residential loans. Its manager, FIDAC, is an Annaly Capital Management subsidiary. The portfolio remains weighted toward credit-sensitive non-Agency RMBS; the company uses leverage and seeks returns primarily through dividends.
Financial results and position
| Metric | Q1 2011 / March 31, 2011 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $206.6 million reported; $227.7 million in MD&A’s portfolio-yield presentation | $129.0 million reported; $179.8 million in MD&A presentation, Q1 2010 |
| Net interest income | $189.3 million | $138.6 million, Q1 2010 |
| Net income | $163.4 million; $0.16 per diluted share | $125.6 million; $0.19 per diluted share, Q1 2010 |
| Comprehensive income | $2.6 million | $370.3 million, Q1 2010 |
| Net interest spread | 5.41% annualized | 5.54%, Q1 2010 |
| Portfolio yield / cost of funds | 8.11% / 2.70% annualized | 10.04% / 4.50%, Q1 2010 |
| Total assets / stockholders’ equity | $10.26 billion / $3.54 billion | $8.07 billion / $3.68 billion, Dec. 31, 2010 |
| Cash and cash equivalents | $16.3 million | $7.2 million, Dec. 31, 2010; $44.2 million, Q1 2010 |
| Debt and leverage | $6.23 billion total debt; 1.8:1 debt-to-equity and 1.1:1 recourse leverage | $4.05 billion and 1.1:1, Dec. 31, 2010; 1.6:1 and 0.7:1, Q1 2010 |
| Operating / investing / financing cash flow | $103.0 million / ($2.09 billion) / $2.00 billion | $75.3 million / ($39.8 million) / ($15.5 million), Q1 2010 |
At March 31, repurchase agreements were $3.87 billion, with a 0.31% weighted-average borrowing rate and 37-day weighted-average remaining maturity. The company reported $3.54 GAAP book value per share and estimated economic book value of $3.18 per share; economic book value is a company-defined non-GAAP measure.
Material changes versus comparable periods
- Net income increased year over year, but diluted EPS fell from $0.19 to $0.16 as weighted-average shares grew from 670.4 million to 1.027 billion. Management attributed the lower EPS to a narrower interest spread and higher realized principal write-downs on non-Agency RMBS.
- Net interest income rose with portfolio growth following 2010 equity offerings. Average earning assets increased to $11.24 billion from $7.16 billion, while the annualized portfolio yield fell to 8.11% from 10.04%. Management cited premium amortization on interest-only securities, debt issuance cost amortization, and swap expense as spread pressures.
- Realized non-Agency RMBS principal write-down losses increased to $19.5 million from $0.9 million. Net credit impairment recognized in earnings was $2.6 million, versus $2.5 million in Q1 2010.
- Unrealized losses on available-for-sale securities produced $160.8 million of negative other comprehensive income, compared with $244.7 million of positive OCI in Q1 2010.
- Agency RMBS fair value increased to $4.88 billion from $2.13 billion at year-end, while non-Agency RMBS fair value declined to $4.96 billion from $5.53 billion. The portfolio’s fixed-rate share rose to 79.8% from 51.7% at year-end.
- Total leverage increased from 1.1:1 at year-end to 1.8:1. The company purchased $3.10 billion of securities during the quarter and funded portfolio expansion principally through repo borrowing.
Outlook, commentary, risks, and unusual items
- No numerical earnings or dividend guidance is provided. Management expected the portfolio to remain weighted toward RMBS and stated it believed available assets and financing arrangements would meet anticipated short-term liquidity needs, while noting that funding access and terms depend on market conditions.
- The declared Q1 common dividend was $0.14 per share, down from $0.17 in Q1 2010. The company intends regular quarterly dividends and must meet REIT distribution requirements, but payment depends on available cash and financing obligations.
- Principal risks include non-Agency mortgage credit losses, housing-market weakness, prepayment and extension risk, interest-rate and asset-liability mismatch, repo renewal and margin-call risk, collateral valuation volatility, and reliance on servicers and other third parties. California represented 38.3% of non-Agency collateral; 79.86% of the consolidated RMBS portfolio was rated below B or unrated, including non-retained securities.
- Repo financing is short-term and floating-rate; $279 million was overnight and most remaining repo debt matured within 60 days. A fall in collateral values or a liquidity disruption could force asset sales or additional capital raising.
- Interest-rate sensitivity estimates show that a 75-basis-point increase was projected to raise net interest income 2.08% while reducing portfolio value 3.79%; a 75-basis-point decrease was projected to reduce net interest income 11.31% while increasing portfolio value 3.58%. Management cautioned actual results may differ materially.
- All reported recurring fair-value securities and swaps were classified Level 2. Valuations rely on models and dealer or pricing-service inputs; management noted market illiquidity and reduced price transparency may make valuations more subjective.
- GAAP consolidation of securitization trusts adds non-retained assets and related non-recourse debt to the balance sheet. Management’s estimated economic book value removes those third-party interests; the measure is not a substitute for GAAP equity and excludes potential value effects of retained trust interests.
- The company recorded $9.8 million of unrealized swap gains; swaps were not designated for hedge accounting. A new equity distribution agreement permits sales of up to 125 million shares, but no shares were sold under it in Q1. No material subsequent events or known material contingencies were reported; management said ordinary-course legal matters were not expected to have a material adverse effect.
Key facts for investors to verify
- Reconcile reported interest income of $206.6 million with the $227.7 million MD&A portfolio-yield figure, and confirm how non-retained VIE income and expense are presented.
- Track realized principal write-downs, credit impairments, loan-loss allowance adequacy, and non-Agency collateral performance and geographic concentration.
- Assess repo counterparties, maturity concentration, haircuts, margin requirements, refinancing access, and the effect of rising rates on funding costs and collateral values.
- Review the basis and sensitivity of Level 2 security valuations and the distinction between GAAP book value and estimated economic book value.
- Monitor dividend coverage, the lower per-share dividend, potential share issuance under the distribution agreement, and REIT qualification requirements.