Business context and reporting period
Chimera Investment Corporation is an internally managed mortgage REIT investing primarily in residential mortgage loans, Non-Agency RMBS and Agency mortgage-backed securities. This Form 10-Q covers the quarter and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020. Figures below are in U.S. dollars unless otherwise stated.
At quarter-end, residential mortgage loans represented about 81% of interest-earning assets by fair value, Non-Agency RMBS 12% and Agency MBS 7%. The company uses leverage and securitizations to finance its portfolio.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $220.6 million | $247.9 million | $716.4 million | $794.1 million |
| Interest expense | $71.4 million | $124.6 million | $260.0 million | $395.9 million |
| Net interest income | $149.2 million | $123.3 million | $456.4 million | $398.2 million |
| Net income (loss) | $331.5 million | $367.3 million | $652.4 million | $(58.4) million |
| Net income (loss) available to common shareholders | $313.0 million | $348.9 million | $597.1 million | $(113.7) million |
| Diluted earnings (loss) per common share | $1.30 | $1.32 | $2.42 | $(0.55) |
Q3 economic net interest spread, a non-GAAP measure, was 3.9% versus 2.5% a year earlier; economic net interest margin was 4.3% versus 3.0%. For the nine months, those measures were 3.8% versus 2.4% and 4.2% versus 2.8%, respectively. Earnings also included $239.5 million of Q3 and $545.6 million of nine-month unrealized gains on financial instruments at fair value. These valuation gains are not equivalent to realized cash earnings.
- Balance sheet: Total assets were $16.00 billion versus $17.52 billion at year-end 2020; stockholders’ equity was $3.85 billion versus $3.78 billion. Cash and cash equivalents were $328.5 million, up from $269.1 million.
- Debt and leverage: Interest-bearing liabilities were about $11.8 billion at quarter-end, down from $13.5 billion. GAAP leverage declined to 3.1:1 from 3.6:1; recourse leverage declined to 1.0:1 from 1.2:1. The company reported $924 million of unused, uncommitted warehouse facilities and compliance with financing covenants.
- Cash flow, nine months: Operating activities provided $410.1 million; investing activities provided $1.84 billion; financing activities used $2.19 billion. Cash increased by $59.4 million. Investing cash flow reflected $1.9 billion of investment sales and $2.7 billion of principal repayments, partly offset by $2.8 billion of purchases. Financing outflows included $5.9 billion of securitized-debt repayments, net $852 million of secured-financing repayments, $221 million to settle warrants, and $276 million of common and preferred dividends.
- Dividends: Common dividends declared were $0.33 per share for Q3 and $0.96 per share for the nine months. Preferred dividends were $18.4 million and $55.3 million, respectively.
Material changes versus comparable periods
- Q3 common earnings declined from $348.9 million to $313.0 million, primarily because the company recorded no investment-sale gains and lower unrealized fair-value gains than in Q3 2020. Higher net interest income and lower debt-extinguishment losses partly offset the decline.
- Nine-month common results improved from a $113.7 million loss to $597.1 million of income. The comparison reflects improved asset prices and lower funding costs, as well as the absence of the $304.1 million of derivative losses recorded in the 2020 period. Nine-month 2021 results also included $284.5 million of debt-extinguishment losses.
- Interest expense fell 43% in Q3 and 34% for the nine months year over year, reflecting lower average borrowings and funding rates, deleveraging, and replacement of higher-cost securitized debt. Interest income also fell as average interest-earning assets were lower following portfolio reductions.
- Residential loan and Non-Agency RMBS delinquency indicators improved. Loans reported as 30 days delinquent or more were 16.2% of unpaid principal at September 30, versus 18.6% at year-end 2020; the comparable Non-Agency RMBS pool measure was 15.4%, versus 16.3%.
- The company reported book value of $12.32 per common share, up from $11.45 at June 30, 2021. It completed additional residential loan purchases and securitizations, and retired or refinanced debt to reduce funding costs.
Outlook, risks and unusual items
- The filing provides no specific earnings or dividend guidance. Management described investment activity as robust and expects to adapt portfolio allocations to market conditions; it cited continued opportunities in seasoned reperforming and higher-coupon business-purpose loans.
- Management said markets had improved but highlighted uncertainty from COVID-19 and the Delta variant, inflation, supply-chain constraints, staffing shortages and interest-rate volatility. Credit deterioration, prepayment changes, asset valuation, liquidity, refinancing and margin-call risks remain important.
- The company had no interest-rate hedges at September 30, 2021. Its modeled sensitivity to a parallel 100-basis-point rate increase was a 5.50% decrease in projected net interest income and a 4.61% decrease in market value; actual results could differ materially.
- Most Non-Agency RMBS and residential mortgage loans are Level 3 fair-value measurements relying on management assumptions. At quarter-end, management’s internally modeled values exceeded third-party prices by $35 million for 25 securities and by $74 million for three loan pools; the company affirmed its higher values after review.
- The company identified LIBOR transition uncertainty and noted that changes in benchmark rates could affect financing and asset cash flows. Management stated it had not yet modified contracts to adopt reference-rate reform.
- Debt repurchases and calls were significant: the company recorded $260 million of nine-month losses on extinguishment of loan-backed securitized debt and a $21 million Q3 loss on repurchasing convertible notes. The convertible notes had no principal outstanding at quarter-end. Subsequent to quarter-end, the company called $22 million of loan-backed securitized debt at par.
- Management reported no material changes to the risk factors in its 2020 Form 10-K, no legal proceedings, and no material change in internal control over financial reporting. Certain securitizations carry obligations to repurchase assets if specified representations and warranties are breached.
Important facts for investors to verify
- How recurring net interest income and earnings available for distribution compare with GAAP earnings, given the material contribution of unrealized fair-value gains and debt-extinguishment losses.
- The assumptions and independent price checks supporting Level 3 loan and Non-Agency RMBS valuations, especially where internal values exceeded third-party indications.
- Near-term financing maturities, collateral haircuts, margin-call exposure and availability of warehouse funding; reported unused warehouse capacity is uncommitted.
- Credit performance of the residential loan and Non-Agency RMBS portfolios, including delinquency trends, realized losses and expected cash flows.
- The effect of rising rates, prepayments and the LIBOR transition on funding costs, portfolio values, liquidity and dividend capacity.