Chimera Investment Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results. Chimera is an internally managed REIT investing primarily in residential mortgage loans and mortgage-backed securities. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
- Q2 earnings: Interest income was $196.9 million and interest expense was $131.2 million, producing net interest income of $65.7 million. Net income was $36.0 million; net income available to common shareholders was $17.6 million, or $0.08 per diluted share.
- First-half results: Net interest income was $135.3 million, down from $254.6 million in H1 2022. Net income available to common shareholders was $56.5 million, or $0.24 per share, versus a $461.0 million loss, or $(1.95) per share, in H1 2022.
- Net interest economics: Q2 economic net interest income, a non-GAAP measure, was $67.0 million; economic net interest spread was 1.2% and net interest margin was 1.9%. For H1, economic net interest income was $136.4 million versus $254.5 million in H1 2022; spread fell to 1.3% from 3.3% and margin to 2.0% from 3.7%.
- Cash flow and liquidity: H1 operating cash flow was $137.3 million, investing cash use was $192.9 million, and financing cash use was $8.0 million. Cash declined $63.7 million to $200.9 million. Management reported $469 million of unencumbered assets and $2.1 billion of unused, uncommitted warehouse facilities.
- Assets and equity: At June 30, total assets were $13.51 billion and stockholders’ equity was $2.58 billion. Loans held for investment were $11.93 billion at fair value; Non-Agency RMBS were $1.09 billion and Agency MBS were $136.3 million. Common book value was $7.29 per share, down from $7.41 at March 31 and $7.49 at year-end 2022.
- Debt and leverage: Secured financing agreements totaled $2.69 billion and securitized debt totaled $8.12 billion, including $8.04 billion of debt carried at fair value against loans. GAAP leverage was 4.2:1 versus 4.0:1 at year-end; recourse leverage was 1.0:1 versus 1.3:1. The average borrowing rate on secured financing agreements was 7.26% at quarter-end, compared with 6.61% at year-end.
- Dividends and repurchases: The Q2 common dividend was reduced to $0.18 per share from $0.23 in Q1. H1 common dividends declared were $0.41 per share versus $0.66 in H1 2022. Chimera repurchased 5.8 million shares in Q2 for $33.1 million at an average $5.66 per share; $217 million remained authorized.
Material changes and management commentary
- Compared with Q2 2022, H1 interest expense rose $107.9 million, largely because of higher funding rates. H1 interest income fell $11.4 million. The company shifted portfolio composition toward loans: loans were about 91% of interest-earning assets at June 30, versus 88% at year-end 2022.
- H1 2023 included $71.5 million of unrealized gains on financial instruments at fair value, compared with $609.4 million of unrealized losses in H1 2022. Management attributed the contrast largely to the prior-year market volatility and 2023 credit-spread tightening.
- During Q2, the company sponsored approximately $1.4 billion of securitizations and continued replacing short-term secured financing with longer-term securitized funding. Management said financing costs remained high and that managing floating-rate liabilities was a priority. It described the interest-rate outlook as uncertain, with rates potentially remaining higher for longer.
- Economic return, defined by the company as change in book value per common share plus common dividends, was 0.8% for Q2 and 2.8% for H1. Management said the dividend reduction better aligned the payout with expected medium-term earnings.
Risks, contingencies, and unusual items
- Interest-rate and funding risk: Higher rates can raise borrowing costs faster than asset yields, compress spreads, reduce fair values, and increase margin or refinancing pressure. Management’s sensitivity analysis estimated that a 100-basis-point rate increase would reduce net interest income by 3.21% and market value by 6.07%; results may differ materially from the model.
- Credit and valuation risk: Loans and much of the Non-Agency RMBS portfolio rely on Level 3 fair-value estimates using significant assumptions. The Non-Agency RMBS allowance for credit losses rose to $13.0 million from $7.2 million at year-end; management cited higher expected losses and delinquencies. Residential loan delinquencies of 30 days or more were 14.8% of unpaid principal at June 30, down from 17.1% at year-end.
- Leverage and collateral: Short-term financing may be difficult or costly to renew; falling collateral values can trigger margin calls or asset sales. $1.2 billion of financing was non-mark-to-market and $316 million was limited mark-to-market at quarter-end. The company reported compliance with financing covenants and no expected covenant breach within 12 months.
- Derivatives and LIBOR transition: Derivatives are not designated as GAAP hedges, so fair-value changes affect earnings. H1 derivative losses were $24.5 million, including $45.2 million paid to terminate swaps. LIBOR-linked mortgage and preferred-stock provisions transitioned or may transition to replacement benchmarks; management said the impact remains uncertain.
- Other items: Q2 included $21.8 million of realized losses from Agency MBS sales and a $4.0 million gain on extinguishment of debt. The filing reports ordinary-course claims and potential repurchase obligations for securitized assets if representations and warranties are breached; it reports no legal proceedings. No material risk-factor changes or subsequent events were reported.
Key facts for investors to verify
- Whether recurring economic net interest income and common dividend coverage remain adequate as funding costs change; review the company’s non-GAAP definitions alongside GAAP results.
- How loan and Non-Agency RMBS credit performance, delinquency trends, credit-loss assumptions, and Level 3 valuations develop.
- Whether securitizations and longer-term funding reduce rollover and margin-call exposure without unduly increasing financing costs.
- How the common book value, leverage, liquidity resources, and repurchase activity evolve after the Q2 dividend reduction.
- The financial and contractual effects of benchmark-rate transitions on adjustable-rate assets and floating-rate preferred shares.