Chimera Investment Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unless otherwise noted, amounts are in U.S. dollars. Chimera is an internally managed REIT investing primarily in residential mortgage loans and mortgage-backed securities, using secured financing and securitizations to fund its portfolio.
Business context and portfolio
At September 30, 2022, residential mortgage loans represented about 88% of interest-earning assets by fair value, Non-Agency RMBS 9%, and Agency MBS 3%. Management said 96% of capital was allocated to Residential Credit assets. The company continued to acquire residential loans while emphasizing lower leverage, liquidity and longer-term financing.
Financial results and key metrics
| Metric | Q3 2022 / September 30, 2022 | Comparable period or prior year-end |
|---|---|---|
| Interest income | $188.3 million | $220.6 million in Q3 2021; $195.4 million in Q2 2022 |
| Interest expense | $83.5 million | $71.4 million in Q3 2021; $78.5 million in Q2 2022 |
| Net interest income | $104.8 million | $149.2 million in Q3 2021; $116.9 million in Q2 2022 |
| Net income (loss) | $(186.1) million; $(0.88) per basic common share | $331.5 million in Q3 2021; $(161.3) million in Q2 2022 |
| Unrealized losses on financial instruments at fair value | $(239.5) million in Q3; $(848.9) million for nine months | Q3 2021 had $239.5 million of unrealized gains; nine months 2021 had $545.6 million of gains |
| Economic net interest income (non-GAAP) | $104.2 million in Q3; $358.7 million for nine months | $149.4 million in Q3 2021; $458.6 million for nine months 2021 |
| Economic net interest spread / net interest margin | 2.5% / 3.1% in Q3 | 2.9% / 3.3% in Q2; nine-month spread and margin were 3.0% / 3.5%, versus 3.8% / 4.2% in 2021 |
| Assets / stockholders’ equity | $13.67 billion / $2.65 billion | $15.41 billion / $3.74 billion at December 31, 2021 |
| Cash and cash equivalents | $86.2 million | $385.7 million at December 31, 2021 |
| Debt and leverage | $10.26 billion of interest-bearing liabilities; GAAP leverage 3.9:1 and recourse leverage 1.1:1 | $11.08 billion of interest-bearing liabilities; leverage 3.0:1 and recourse leverage 0.9:1 at December 31, 2021 |
| Book value per common share | $7.44 | $8.82 at June 30, 2022 |
For the nine months, operating cash flow was $299.3 million, investing activities provided $655.5 million, and financing activities used $1.25 billion. Cash declined by $299.5 million from year-end. The company declared common dividends of $0.23 per share in Q3 and $0.89 per share for the nine months.
Material changes and management commentary
- Management attributed portfolio markdowns and book-value declines to higher interest rates and wider credit spreads. Q3 interest expense rose $5.0 million from Q2 as secured financing rates increased; Q3 net interest income fell $12.1 million.
- Nine-month net loss available to common shareholders was $665.5 million, versus income of $597.1 million in the prior-year period. The change primarily reflected $1.4 billion more in unrealized losses, lower net interest income and realized investment losses, partly offset by fewer debt-extinguishment losses and lower expenses.
- Management reported Q3 earnings available for distribution, a non-GAAP measure, of $62.6 million, or $0.27 per adjusted diluted share, down from $73.9 million, or $0.31, in Q2. It cited higher funding costs and the absence of prepayment penalties or early paydowns.
- During Q3 the company reduced secured financing borrowings by $328 million versus Q2, sponsored a $370 million seasoned-loan securitization, and entered into two SOFR-based interest-rate swaps with $885 million notional. It also purchased a $1.0 billion-notional swaption earlier in 2022.
- Management committed to purchase $211 million of seasoned re-performing loans and $476 million of Prime Jumbo loans, expected to settle in Q4. It also purchased $66 million of business-purpose loans in Q3. Management gave no specific quantitative earnings or dividend guidance.
Outlook, risks and contingencies
Management described the near-term economic and market outlook as challenging, with elevated rate and spread volatility expected until inflation materially softens. It intends to continue acquiring Residential Credit assets, use securitizations and seek durable financing, but warned that further rate increases, spread widening, weaker housing conditions or tighter financing could pressure asset values, earnings and liquidity.
- Short-term secured funding is exposed to refinancing, higher borrowing costs, collateral haircuts and potential margin calls. At quarter-end, $737 million of secured financing was non-mark-to-market and $476 million was limited mark-to-market. The company reported $2.0 billion of unused, uncommitted warehouse facilities.
- Its sensitivity analysis estimated that an immediate 100-basis-point rate increase could reduce projected net interest income by 4.78% and market value by 5.95%; actual effects may differ materially.
- Credit, prepayment, extension, basis and counterparty risks remain significant. Residential loans 30 or more days delinquent, in bankruptcy, foreclosure or REO totaled 17.2% of unpaid principal at September 30, down from 20.7% at year-end 2021.
- Many portfolio valuations rely on Level 3 models and management assumptions. The company noted that actual results could differ materially from these estimates.
- The company was in compliance with financing covenants and stated it did not expect to breach them within twelve months. It disclosed ordinary-course claims and possible repurchase obligations for securitized assets if representations and warranties are breached; it reported no legal proceedings and no subsequent events.
Investor facts to verify
- Whether continuing rate and spread volatility affects book value, portfolio marks, funding costs and the ability to maintain liquidity.
- How Q4 settlements of the committed loan purchases are financed, and whether the expected $393 million Prime Jumbo financing facility is completed on the stated terms.
- Whether earnings available for distribution and REIT taxable income support future common dividends; the filing cautions that its non-GAAP distribution measure is not a guarantee of dividends.
- The assumptions and independent pricing support for material Level 3 loan and securities valuations, including loans where internal values exceeded third-party indications.
- The cash-flow statement reports a $299.5 million decline in cash, while MD&A states a $228 million decline; verify this apparent filing-text inconsistency.