Chimera Investment Corporation — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020. Chimera is a mortgage REIT investing in residential mortgage loans and Agency and Non-Agency mortgage-backed securities. Results reflect severe market disruption associated with COVID-19.
Financial results and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $300.3 million | $350.4 million in Q1 2019 |
| Interest expense | $142.1 million | $203.0 million in Q1 2019 |
| Net interest income | $158.2 million | $147.4 million in Q1 2019 |
| Net income (loss) | $(370.8) million | $118.1 million in Q1 2019 |
| Net income (loss) available to common shareholders; diluted EPS | $(389.2) million; $(2.08) | $100.8 million; $0.54 in Q1 2019 |
| Core earnings, a non-GAAP measure | $105.9 million; $0.57 per basic share | $107.7 million; $0.58 in Q1 2019 |
| Cash and cash equivalents | $261.5 million | $109.9 million at December 31, 2019 |
| Total assets / stockholders’ equity | $19.24 billion / $3.24 billion | $27.12 billion / $3.95 billion at December 31, 2019 |
| Repurchase agreements / total interest-bearing debt | $7.15 billion / $15.14 billion | $13.43 billion / $21.74 billion at December 31, 2019 |
| GAAP leverage / recourse leverage | 4.7:1 / 2.2:1 | 5.5:1 / 3.4:1 at December 31, 2019 |
| Book value per common share | $12.45 | $16.15 at December 31, 2019 |
Cash flow from operations was $(419.5) million, investing activities provided $6.65 billion, and financing activities used $6.07 billion. Operating cash use was principally associated with $464 million paid to terminate interest-rate swaps. The filing does not present a conventional profit margin measure.
Material changes versus the prior comparable period
- GAAP results swung from profit to a substantial loss, primarily reflecting COVID-related asset repricing and portfolio repositioning. Derivative losses were $304.1 million, unrealized losses on financial instruments at fair value were $260.9 million, and realized investment-sale gains were $75.9 million.
- Net interest income increased 7% year over year even as interest income fell 14%; lower interest expense, including lower borrowing rates and reduced Agency financing, more than offset the income decline. Economic net interest income, a non-GAAP measure, was $150.5 million versus $151.3 million in Q1 2019.
- Chimera sold its Agency RMBS holdings as a liquidity and deleveraging measure, generating about $6.3 billion of investment-sale proceeds, and reduced repurchase-agreement borrowings about 47% from year-end. The portfolio shifted toward residential mortgage loans, which represented about 75% of interest-earning assets at amortized cost at quarter-end.
- The company paid $464 million to terminate swaps with $4.1 billion notional and had no interest-rate hedges at March 31. Accumulated other comprehensive income fell to $502.5 million from $708.3 million at year-end.
- Q1 common dividends declared were $0.50 per share, unchanged from Q1 2019. The company repurchased 1.4 million common shares for $22.1 million.
Outlook, risks, contingencies, and unusual items
- Management said it expected to adjust the common dividend beginning in Q2 2020, but did not specify the amount; the board retained discretion over future declarations. The company stated its intention to distribute at least 90% of REIT taxable income, while reporting that it did not then expect taxable income for 2020.
- Management described unusually volatile and illiquid mortgage and financing markets, increased repo haircuts and margin calls, and uncertainty around refinancing short-term borrowings. It warned that further margin calls or funding constraints could force asset sales at depressed prices and impair liquidity, earnings, and dividends.
- Residential loans and Non-Agency RMBS face heightened credit risk from unemployment, delinquencies, forbearance, and potential housing-market weakness. At quarter-end, 17.3% of reported residential-loan unpaid principal balance was delinquent or in specified distressed categories; the filing reports 90-plus-day delinquencies of 2.6%.
- Fair values for substantial loan and Non-Agency RMBS positions rely on Level 3 models and management assumptions. For certain holdings, management affirmed internally modeled prices above third-party indications, including loan pools valued $56 million higher and securities valued $13 million higher than the cited third-party prices.
- CECL accounting was adopted January 1, 2020; the company recorded a $6.3 million Q1 credit-loss provision on available-for-sale securities. The transition had no opening-equity impact.
- Subsequent event: In April, Chimera issued $374 million principal amount of 7.00% convertible notes due 2023 and received approximately $362 million net. About $51 million principal had converted into roughly 8 million common shares before the report date. It also spent approximately $33.8 million on capped-call transactions intended to limit dilution, subject to a cap.
- The company reported no legal proceedings. It had a $150 million commitment to Hains Point, of which $101 million was funded, and $379 million of unfunded construction-loan commitments at March 31.
Important facts for investors to verify
- Subsequent quarterly dividend declarations and the board’s stated expectation of a Q2 adjustment.
- Cash, repo availability, haircuts, margin requirements, and maturities as market conditions evolve.
- Loan delinquency and credit performance, Non-Agency RMBS loss assumptions, and any further CECL provisions.
- Valuation assumptions and the gap between internal marks and third-party pricing in illiquid assets.
- Convertible-note conversions, resulting share dilution, and the remaining effect of capped-call coverage.