Business Context and Reporting Period
Company: Chimera Investment Corporation (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: Chimera is a specialty finance company investing primarily in residential mortgage-backed securities (RMBS), including non-Agency and Agency classes, and securitized residential mortgage loans. The company is externally managed by Fixed Income Discount Advisory Company (FIDAC), a subsidiary of Annaly Capital Management, Inc.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Interest Income | $56.8 million | $9.9 million | $75.7 million | $24.1 million |
| Net Income (Loss) | $51.6 million | $33.9 million | $70.5 million | ($21.0 million) |
| Diluted EPS | $0.10 | $0.87 | $0.21 | ($0.54) |
| Total Assets | $4.21 billion | $1.48 billion (Dec 31, 2008) | - | - |
| Total Liabilities | $2.26 billion | $1.06 billion (Dec 31, 2008) | - | - |
| Stockholders' Equity | $1.95 billion | $0.41 billion (Dec 31, 2008) | - | - |
| Cash & Equivalents | $13.1 million | $27.5 million (Dec 31, 2008) | - | - |
| Debt-to-Equity Ratio | 1.0:1 | 3.6:1 (Q2 2008) | - | - |
Portfolio Composition (June 30, 2009):
- Non-Agency RMBS: $1.75 billion (Fair Value)
- Agency RMBS: $1.89 billion (Fair Value)
- Securitized Loans: $530.6 million (Net of allowance)
Material Changes vs. Prior Period
- Equity Capitalization: Stockholders' equity increased significantly from $414.5 million at year-end 2008 to $1.95 billion at June 30, 2009. This was driven by two major secondary offerings in April and May/June 2009, raising approximately $1.46 billion in net proceeds.
- Asset Growth: Total assets more than doubled from $1.48 billion to $4.21 billion, reflecting the deployment of capital raised in equity offerings into Agency and Non-Agency RMBS.
- Profitability: Net income for Q2 2009 ($51.6M) exceeded Q2 2008 ($33.9M) despite a lower EPS due to significant share dilution. The Q2 2008 EPS was inflated by a $25.6 million unrealized gain on interest rate swaps, which was absent in Q2 2009.
- Cost of Funds: The annualized cost of funds dropped dramatically from 5.53% in Q2 2008 to 2.40% in Q2 2009, reflecting lower market interest rates and the termination of interest rate swaps.
- Impairments: The company recorded $6.5 million in other-than-temporary impairment (OTTI) losses in Q2 2009 related to subordinated non-Agency RMBS, compared to zero in Q2 2008.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the increase in net interest income to the decline in borrowing costs, the purchase of higher-yielding assets with proceeds from secondary offerings, and the termination of interest rate swaps. The company expects to continue borrowing via repurchase agreements and securitizations.
Subsequent Events: On July 30, 2009, the company completed a re-securitization transaction transferring $1.5 billion in RMBS to a trust, realizing an $8.5 million gain.
Risks and Contingencies:
- Liquidity Risk: The company relies heavily on repurchase agreements for financing. A decline in collateral value or increased prepayment rates could trigger margin calls, potentially forcing asset sales at depressed prices.
- Market Risk: Significant exposure to interest rate risk and prepayment risk. Rising rates could increase borrowing costs faster than asset yields adjust, while falling rates could accelerate premium amortization.
- Credit Risk: Exposure to credit losses in the non-Agency RMBS portfolio and securitized loans. Delinquencies in the securitized loan portfolio rose to 1.05% (60+ days) as of June 30, 2009.
- Valuation Risk: In illiquid markets, obtaining third-party pricing for non-Agency RMBS is difficult, increasing the subjectivity of fair value measurements.
Investor Verification Checklist
- Capital Deployment: Verify the yield and credit quality of the $1.46 billion in new assets purchased with proceeds from the April and June 2009 equity offerings.
- Financing Stability: Review the terms and maturity profile of the $1.5 billion in repurchase agreements, noting the concentration of maturities within 30 days.
- Credit Quality Trends: Monitor the allowance for loan losses (currently $3.0 million) and delinquency rates in the securitized loan portfolio, which have increased from prior periods.
- OTTI Exposure: Assess the remaining exposure to subordinated non-Agency RMBS that may be susceptible to future other-than-temporary impairments.
- Dividend Sustainability: Confirm that REIT taxable income supports the declared dividend of $0.08 per share, noting the reconciliation between GAAP net income and REIT taxable income.