Business context and reporting period
Chimera Investment Corporation is an internally managed REIT investing primarily in residential mortgage loans, Non-Agency RMBS and Agency mortgage-backed securities. This Form 10-Q covers the quarter ended March 31, 2022. The portfolio was approximately 86% residential mortgage loans, 10% Non-Agency RMBS and 4% Agency MBS by fair value of interest-earning assets.
Key financial metrics
| Metric | Q1 2022 | Comparison |
|---|---|---|
| Interest income | $202.2 million | $221.2 million in Q4 2021; $243.1 million in Q1 2021 |
| Interest expense | $64.5 million | $66.6 million in Q4 2021; $108.1 million in Q1 2021 |
| Net interest income | $137.7 million | $154.6 million in Q4 2021; $135.1 million in Q1 2021 |
| Net income (loss) | $(262.8) million | $17.7 million in Q4 2021; $157.6 million in Q1 2021 |
| Net loss available to common shareholders | $(281.2) million; $(1.19) per basic share | $(0.7) million in Q4 2021; $139.2 million in Q1 2021 |
| Net unrealized losses on financial instruments at fair value | $(370.2) million | $(108.3) million in Q4 2021; $270.0 million in Q1 2021 |
| Cash from operating activities | $135.9 million | $122.2 million in Q1 2021 |
| Cash and cash equivalents | $165.7 million at quarter-end | $385.7 million at December 31, 2021 |
| Total assets / stockholders' equity | $15.24 billion / $3.34 billion | $15.41 billion / $3.74 billion at December 31, 2021 |
| Interest-bearing debt | Approximately $11.5 billion | Approximately $11.1 billion at December 31, 2021 |
| GAAP leverage / recourse leverage | 3.5:1 / 1.0:1 | 3.0:1 / 0.9:1 at December 31, 2021 |
Economic net interest income, a non-GAAP measure, was $137.7 million, compared with $154.6 million in Q4 2021 and $136.1 million in Q1 2021. The economic net interest rate spread was 3.7% and net interest margin was 4.1%, down 0.4 percentage points from Q4 2021 for each measure. Earnings available for distribution, also non-GAAP, was $93.7 million, or $0.39 per adjusted diluted share, versus $110.6 million, or $0.46, in Q4 2021 and $86.5 million, or $0.36, in Q1 2021. The company declared common dividends of $0.33 per share.
Cash declined by $220.0 million during the quarter: operating activities provided $135.9 million, investing activities used $187.3 million and financing activities used $168.6 million. Financing cash outflows included $97 million of common and preferred dividends. The company reported $1.2 billion of unused, uncommitted warehouse facilities; availability is subject to market and lender conditions.
Material changes versus comparable periods
- Compared with Q4 2021, the common-shareholder loss widened substantially, chiefly because fair-value losses increased amid rising rates and wider credit spreads. Management reported book value per common share of $10.15, down $1.69 from $11.84 at year-end 2021.
- Net interest income fell $16.9 million sequentially as interest income declined more than interest expense. Management attributed lower income to reduced average interest-earning assets and slightly lower yields on loans and Non-Agency RMBS.
- Compared with Q1 2021, net interest income was modestly higher, despite lower interest income, as interest expense fell by $43.6 million. Management cited deleveraging, lower secured-financing rates and replacement of higher-cost securitized debt.
- Interest-earning assets were $14.94 billion at quarter-end, while portfolio mix shifted toward loans. Total interest-bearing liabilities increased from year-end, and reported GAAP leverage rose from 3.0:1 to 3.5:1, reflecting lower equity as well as balance-sheet changes.
Outlook, management commentary, risks and unusual items
- No specific earnings or dividend guidance was provided. Management said it remained active in residential loans and believes buying, financing and securitizing residential mortgage loans can generate positive risk-adjusted returns over the long term, subject to market conditions.
- The company committed to acquire $807 million of residential loans; $570 million settled during Q1 and approximately $237 million was expected to settle in Q2. It sponsored the CIM 2022-R1 securitization of $328 million in seasoned reperforming loans, selling approximately $264 million of senior securities and retaining subordinate and interest-only interests.
- Following acquisitions of assets from Hains Point, LLC, Chimera consolidated two securitization trusts. This added approximately $1.0 billion of loans and $775 million of securitized debt; retained subordinated interests were eliminated in consolidation.
- Management cited inflation, higher expected Federal Reserve rates, the war in Ukraine, wider mortgage and credit spreads, and an inverted yield curve as market pressures. It noted the possibility of recession within 12 to 24 months. Rising rates and spread widening reduced asset values; fair-value gains on securitized debt partially offset asset losses.
- Interest-rate risk is significant: the company reported no interest-rate hedges at March 31, 2022. Its sensitivity analysis estimated that a parallel 100-basis-point rate increase would reduce projected net interest income by 7.38% and asset market value by 6.95%; actual outcomes may differ materially.
- Short-term repurchase funding, collateral haircuts and potential margin calls create liquidity and refinancing risks. Approximately $1.1 billion of secured financing was non-mark-to-market, limiting margin-call exposure on that collateral. Management believed available assets and arrangements were sufficient for anticipated short-term needs, but warned that tighter financing could require asset sales or curtailed acquisitions.
- The company is exposed to credit, prepayment, extension, basis, valuation and counterparty risks. Most loans and Non-Agency RMBS are valued using Level 3 inputs and management models; the company affirmed certain internally valued prices above third-party indications. Residential loans at least 90 days past due had a fair value of $899 million.
- LIBOR transition is ongoing; relevant USD LIBOR tenors were expected to cease or become non-representative after June 30, 2023. Chimera was evaluating the impact of the LIBOR Act and transition to SOFR. The filing reports no material changes to previously disclosed risk factors, no legal proceedings, and no subsequent events.
Important facts for investors to verify
- Whether loan and securities valuations, particularly Level 3 assumptions, remain supportable as rates and credit spreads change.
- How book value, leverage and liquidity respond to further market moves, collateral calls and refinancing of short-term secured funding.
- Whether net interest income and earnings available for distribution can sustain the common dividend; these non-GAAP earnings measures are not equivalent to REIT taxable income or a dividend guarantee.
- The performance and credit quality of residential loans and Non-Agency RMBS, including delinquency trends and expected losses.
- The terms and financial effects of LIBOR-to-SOFR conversion across borrowings, adjustable-rate assets and fixed-to-floating preferred shares.