Chimera Investment Corporation — Q1 2024 Form 10-Q
Reporting period: Quarter ended March 31, 2024. Chimera is an internally managed mortgage REIT investing primarily in residential mortgage loans, with smaller Non-Agency and Agency MBS portfolios. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Financial performance and position
- Interest income: $186.6 million, down 1% year over year. Interest expense was $121.5 million, up 2%, leaving GAAP net interest income of $65.1 million, down 6.5% year over year.
- Profit: GAAP net income was $129.5 million; income available to common shareholders was $111.0 million, or $0.46 per basic share ($0.45 diluted). A large portion of reported profit reflected $76.8 million of unrealized gains on financial instruments and $10.7 million of net derivative gains. Q1 2023 common income was $38.9 million, or $0.17 per basic share.
- Recurring-income measures: Economic net interest income, a non-GAAP measure, was $68.0 million versus $69.4 million a year earlier. Economic net interest spread was 1.4% and net interest margin was 2.1%. Earnings available for distribution, also non-GAAP, was $30.6 million, or $0.12 per adjusted diluted share, versus $31.5 million, or $0.13, a year earlier.
- Cash flow and liquidity: Operating activities generated $57.3 million and investing activities generated $248.3 million; financing activities used $358.3 million. Cash declined $52.7 million to $169.0 million. The company reported $418 million of unencumbered assets and $2.1 billion of unused, uncommitted warehouse facilities.
- Assets, debt and equity: Total assets were $12.55 billion and stockholders’ equity was $2.65 billion. Interest-bearing debt was about $9.79 billion; period-end GAAP leverage was 3.7:1 and recourse leverage was 0.9:1, compared with 4.0:1 and 1.0:1 at year-end 2023. Much of the debt is securitized and non-recourse, payable from the related collateral.
- Portfolio and credit: Loans held for investment had a fair value of $11.07 billion; Non-Agency RMBS were $1.06 billion and Agency MBS were $66.0 million. Residential loan delinquencies, bankruptcy, foreclosure and REO totaled 15.9% of unpaid principal balance, compared with 15.8% at year-end. The Non-Agency RMBS allowance for credit losses was $19.9 million, up from $18.6 million.
- Book value and distributions: Management reported book value per common share of $7.11, up from $6.75 at year-end, and a 7.0% quarterly Economic Return (book-value change plus common dividend). The common dividend declared was $0.11 per share, versus $0.23 in Q1 2023; preferred dividends declared totaled $18.4 million.
Material changes and management commentary
- Compared with Q4 2023, common income rose from $12.1 million to $111.0 million, primarily reflecting stronger fair-value gains and derivative results. Net interest income was broadly stable at $65.1 million versus $64.7 million.
- Management attributed improved asset values to tighter residential credit spreads. It described U.S. housing conditions as resilient and said portfolio credit performance remained within or better than original expectations.
- The company continued reducing leverage and Agency CMBS exposure. It sold about $35 million of Agency CMBS, recognizing a $3.75 million realized loss, and reduced secured financing by $47 million from year-end. It invested about $34 million in subordinated mortgage securitization tranches and settled $78 million of residential transition loans.
- Management said it is taking a more defensive posture amid persistent inflation, higher-for-longer interest rates and greater rate volatility. It exercised $1.0 billion of swaptions into pay-fixed swaps and intends to continue using swaps and swaptions to hedge borrowing costs. Management provided no specific earnings or dividend guidance.
Risks, contingencies and notable items
- Rates and funding: Most secured financing and warehouse borrowings are short-term and floating-rate; refinancing, higher funding costs, collateral haircuts or margin calls could pressure liquidity. Management’s modeled parallel-rate scenarios show net interest income down 7.05% and portfolio market value down 6.46% for a 100-basis-point rate increase; actual outcomes may differ.
- Credit and valuation: Mortgage delinquencies, defaults, loss severity and prepayment behavior affect cash flows and asset values. A substantial share of loans and Non-Agency RMBS is Level 3, relying on models and significant assumptions. Management noted increases in expected losses and delinquencies affecting the RMBS credit allowance.
- Concentration and counterparty exposure: Nomura represented $474 million of exposure at risk, equal to 18% of equity. The company also faces counterparty, collateral and derivative risks.
- Commitments and legal matters: The company had a $19 million remaining unfunded commitment to a managed fund and $5 million of unfunded construction-loan commitments. It may be required to repurchase securitized assets if specified representations or warranties are breached. No legal proceedings were reported; management stated there were no material changes to the risk factors in its 2023 Form 10-K.
- Controls: Management concluded disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Investor verification priorities
- Separate recurring portfolio income and distribution capacity from the quarter’s substantial unrealized fair-value and derivative gains; review the company’s non-GAAP reconciliations.
- Track residential loan delinquency and loss trends, the RMBS credit allowance, and assumptions underlying Level 3 valuations.
- Assess refinancing and margin-call exposure by secured-financing maturity, collateral type, and the share of non-mark-to-market or limited-mark-to-market facilities.
- Monitor cash, unencumbered assets, warehouse availability, leverage, and the concentration of counterparty exposure, particularly Nomura.
- Confirm future common and preferred dividends against taxable income, cash needs, and financing obligations; Q1’s dividend declaration is not a guarantee of future payments.