Business context and reporting period
Chimera Investment Corporation is a mortgage REIT investing primarily in residential mortgage loans and mortgage-backed securities, using leverage and securitizations to finance its portfolio. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Unless otherwise noted, dollar amounts below are in millions.
COVID-19 market disruption drove a major portfolio and financing repositioning. Chimera sold its Agency RMBS pass-through portfolio in the first quarter to raise liquidity and reduce leverage. At quarter-end, loans held for investment represented about 79% of interest-earning assets at amortized cost, versus 55% at year-end 2019.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $123.3 | $141.6 | $398.2 | $430.8 |
| Net income (loss) | $367.3 | $106.3 | ($58.4) | $283.2 |
| Net income (loss) available to common | $348.9 | $87.9 | ($113.7) | $229.0 |
| Basic earnings (loss) per common share | $1.50 | $0.47 | ($0.55) | $1.22 |
| Net realized gains on investment sales | $65.0 | $1.6 | $167.3 | $2.7 |
Q3 earnings benefited from $260.8 million of unrealized gains on fair-value instruments and $65.0 million of realized investment-sale gains. These were partly offset by a $55.8 million debt-extinguishment loss. For the nine-month period, the company reported $304.1 million of net derivative losses, $172.0 million of unrealized losses on fair-value instruments, and the $55.3 million debt-extinguishment loss; net interest income and investment-sale gains partially offset these items.
Economic net interest income, a non-GAAP measure, was $124.8 million in Q3 2020 versus $138.2 million in Q3 2019. The economic net interest rate spread was 2.5% versus 1.9%, and net interest margin was 3.0% versus 2.2%. For the first nine months, the spread was 2.4% versus 2.0%, and margin was 2.8% versus 2.3%. Management expects economic net interest income to decline in the near term following the Agency RMBS sale, citing lower earning-asset balances and expected higher financing expenses.
| Balance-sheet metric | September 30, 2020 | December 31, 2019 |
|---|---|---|
| Total assets | $18,093.9 | $27,118.7 |
| Cash and cash equivalents | $325.7 | $109.9 |
| Secured financing agreements | $4,700.0 | $13,427.5 |
| Total stockholders’ equity | $3,696.5 | $3,953.3 |
| GAAP leverage | 3.7:1 | 5.5:1 |
| Recourse leverage | 1.3:1 | 3.4:1 |
Total interest-bearing debt was approximately $13.6 billion at quarter-end, including secured financing and securitized debt. Securitized debt is generally non-recourse and payable from its related collateral. Common book value per share was $11.91, up from $10.63 at June 30, 2020 but below $16.15 at December 31, 2019.
For the first nine months, operating activities provided $180.6 million of cash, investing activities provided $8.1 billion, and financing activities used $8.1 billion. Investing cash flow primarily reflected Agency MBS sales; financing outflows included net repayments of secured financing and dividends. Cash increased by $215.8 million during the period.
Material changes versus prior periods
- Secured financing fell about 65% from year-end 2019, and recourse leverage declined to 1.3:1 from 3.4:1, as the company sold Agency RMBS and reduced short-term financing exposure.
- Chimera sponsored seven residential-loan securitizations during the first nine months, with approximately $2.6 billion of loans securitized across the reported quarters. Securitization debt collateralized by loans rose to $8.8 billion principal from $8.2 billion at year-end.
- Portfolio mix shifted materially toward residential loans; Agency RMBS pass-through holdings were sold. The company also reported no derivative instruments at September 30, 2020, after terminating its swaps and closing Treasury futures positions earlier in the year.
- Common dividends declared fell to $0.30 per share in Q3 and $1.10 per share for the first nine months, compared with $0.50 and $1.50 in the respective 2019 periods. Common shares outstanding increased to 232.2 million from 187.2 million, in part due to conversion of approximately $301 million of convertible notes into about 46 million shares.
- Residential-loan delinquencies of 30 days or more were 19.6% of unpaid principal at September 30, versus 18.1% at year-end; loans 90 or more days delinquent were 5.6%, versus 2.2%.
Outlook, risks, contingencies, and unusual items
- Management said COVID-19’s duration and effects remain uncertain. It cited potential further mortgage-credit deterioration, market volatility, illiquidity, higher financing haircuts, margin calls, asset-price declines, and difficulty renewing or replacing short-term financing.
- The company had $1.7 billion of unused, uncommitted warehouse facilities. It reported compliance with financing covenants and did not expect a covenant breach within 12 months. About 87% of credit repurchase facilities were described as non-mark-to-market or longer-term financing. These arrangements may reduce margin-call exposure but some longer-term funding carries higher rates.
- Chimera had no interest-rate hedges at quarter-end and stated it did not currently have hedges to mitigate rising-rate risk. Its market-risk discussion also emphasizes interest-rate mismatch, prepayment and extension risk, and uncertainty in asset valuations.
- Significant portfolio assets use Level 3 valuation inputs and internal models. Management’s estimates depend on assumptions about prepayments, defaults, loss severity and discount rates; actual values could differ. During Q3, 22 securities with internally modeled value of $384 million were priced about $1 million above third-party indications after review.
- In April, the company issued $374 million of 7.0% convertible senior notes due 2023; approximately $301 million had converted by quarter-end, leaving $73 million principal outstanding. In June it entered a $400 million secured, non-mark-to-market credit agreement and issued warrants for up to 20.3 million shares at $0.01 per share, approximately 7.7% of common stock after issuance. Warrants may be settled in cash at 90% of fair market value and could dilute shareholders or reduce book value per share.
- The company declared no definitive future common-dividend amount. Management said the board will evaluate dividends as conditions evolve; the company intends to distribute at least 90% of REIT taxable income if applicable. It currently does not expect taxable income for 2020 and said future taxable income is uncertain.
- Other disclosed items include a $150 million Hains Point capital commitment, of which $141 million was funded, and $154 million of unfunded construction-loan commitments. The filing reports no material legal proceedings and no subsequent events.
Most important facts for investors to verify
- Whether cash, funding availability, collateral haircuts and margin calls remain adequate as secured financing matures or market conditions change.
- Performance of the residential-loan portfolio, including delinquency trends, COVID-19-related borrower stress and resulting credit losses.
- Assumptions and third-party support for Level 3 valuations, particularly for loans and Non-Agency RMBS, and the effect of valuation changes on book value.
- How the absence of hedges, interest-rate movements and prepayment behavior affect net interest income and asset values.
- Potential dilution and book-value effects from remaining convertible notes and the 20.3 million-share warrants, as well as the board’s future dividend decisions.
- That reported Q3 profit relied substantially on fair-value gains and realized asset-sale gains, while nine-month results included substantial derivative and fair-value losses.