CHIMERA INVESTMENT CORP quarterly report, Q2 FY2020

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Business context and reporting period

Chimera Investment Corporation is a leveraged mortgage REIT investing in residential mortgage loans and Agency and Non-Agency mortgage-backed securities. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; comparisons are to the corresponding 2019 periods unless otherwise noted. Management attributed major portfolio and market effects to the COVID-19 disruption.

Financial performance and condition

  • Income and earnings: Q2 interest income was $245.9 million and interest expense was $129.3 million, producing net interest income of $116.7 million, down from $141.8 million. Net loss was $55.0 million; after $18.4 million of preferred dividends, loss available to common shareholders was $73.4 million, or $0.37 per diluted share, versus income of $40.3 million, or $0.21, a year earlier.
  • Six-month results: Net interest income was $274.9 million versus $289.2 million. Net loss was $425.7 million and loss available to common shareholders was $462.6 million, or $2.39 per diluted share, compared with income available to common shareholders of $141.1 million, or $0.75, in 2019.
  • Drivers and margins: Q2 GAAP fair-value losses on financial instruments were $171.9 million; H1 losses were $432.8 million. H1 derivative losses were $304.1 million, partly offset by $102.2 million of realized investment-sale gains. Non-GAAP economic net interest income was $121.0 million in Q2 versus $143.5 million; economic net interest spread was 2.4% versus 2.0%, and net interest margin was 2.8% versus 2.3%. Management expects lower economic net interest income near term following the Agency RMBS sale.
  • Cash flow and liquidity: H1 operating cash flow was $18.1 million, investing cash flow was $7.0 billion, and financing cash flow was negative $6.9 billion. Cash increased to $302.6 million from $109.9 million at year-end 2019. Management said it believes available assets and borrowing arrangements can meet anticipated short-term needs, while warning that prolonged market disruption could impair liquidity.
  • Balance sheet and leverage: Total assets were $18.45 billion versus $27.12 billion at December 31, 2019; stockholders’ equity was $3.40 billion versus $3.95 billion. Secured financing agreements were $5.94 billion, securitized debt was $8.65 billion, and long-term debt was $71.6 million. GAAP leverage was 4.3:1 versus 5.5:1; recourse leverage was 1.8:1 versus 3.4:1. Book value per common share fell to $10.63 from $16.15.
  • Portfolio: At June 30, loans held for investment were 75.4% of interest-earning assets at amortized cost, Agency CMBS 13.8%, Non-Agency RMBS 10.0%, and Agency RMBS 0.8%. Loans held for investment had fair value of $13.04 billion. The share of loans 30 or more days delinquent, in bankruptcy, foreclosure, or REO rose to 20.5% of unpaid principal from 18.1% at year-end.

Material changes versus prior periods

  • Chimera sold its Agency RMBS portfolio in Q1 2020, generating $6.5 billion of H1 proceeds, and used proceeds to repay financing and strengthen liquidity. Interest income declined 28% in Q2 and 21% in H1, with management citing the sale and CECL-related yield reductions.
  • Secured financing agreements declined about 56% from year-end. The company reduced short-term repo exposure, completed securitizations, and obtained longer-term and non-mark-to-market financing. H1 asset sales and principal collections substantially exceeded purchases.
  • Interest-rate swaps were terminated in Q1; Chimera had no derivative positions at June 30. It paid $464 million to terminate swaps during H1, contributing to reported derivative losses.
  • Q2 common dividends declared were $0.30 per share, down from $0.50 in Q2 2019; H1 dividends were $0.80 versus $1.00 per share.

Outlook, commentary, risks and unusual items

  • Management described mortgage and financing markets as volatile and illiquid, with elevated haircuts and margin calls. It warned that further asset markdowns, higher collateral requirements, forced sales, credit deterioration, or difficulty renewing short-term funding could materially harm liquidity, results, and dividends.
  • Chimera had no interest-rate hedges at quarter-end and noted that its assets and funding may respond differently to rate changes. Its sensitivity analysis showed projected annual economic net interest income falling 17.0% for a 50-basis-point rate increase and 33.9% for a 100-basis-point increase; management cautioned that actual results may differ materially.
  • The company issued $374 million of 7.00% convertible notes due 2023; approximately $299 million converted into about 46 million common shares by June 30, leaving $74 million principal outstanding. It also entered a $400 million secured, non-mark-to-market credit facility and issued warrants for up to 20.3 million shares at $0.01 each, representing approximately 7.7% of common stock after issuance; the warrants may be cash-settled at 90% of then-current fair value.
  • Management stated it currently did not expect taxable income for 2020, but future taxable income was uncertain. The board retains discretion over dividends; the company intends to distribute at least 90% of REIT taxable income to maintain REIT status.
  • Other commitments include a $150 million Hains Point capital commitment, of which $140 million was funded, and $247 million of unfunded construction-loan commitments. The filing reported no material change to previously disclosed risk factors, no legal proceedings, and no subsequent events.

Important facts for investors to verify

  1. Whether mortgage delinquencies, borrower performance, and expected credit losses continue to worsen, particularly in the residential loan portfolio.
  2. Whether funding facilities renew on acceptable terms and whether margin calls, haircuts, collateral needs, or covenant limits constrain liquidity; monitor the disclosed $1.6–$1.75 billion equity/net-asset-value covenant thresholds.
  3. How fair values of loans and Non-Agency RMBS—substantially Level 3 estimates—change as market conditions and valuation assumptions evolve.
  4. The effect of the 20.3 million warrants and any further note conversions on share count, book value per share, and common dividends.
  5. Whether recurring interest income and financing costs support distributions; distinguish GAAP earnings from management’s non-GAAP economic net interest income and core earnings.