Chimera Investment Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Chimera is a leveraged mortgage REIT investing in residential mortgage loans, Agency mortgage-backed securities (MBS), and Non-Agency residential MBS. It seeks income from the spread between asset yields and financing costs and uses derivatives to manage interest-rate exposure.
Key financial and operating metrics
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $350.4 million | $297.1 million in Q1 2018 |
| Interest expense | $203.0 million | $149.3 million in Q1 2018 |
| GAAP net interest income | $147.4 million | $147.9 million in Q1 2018 |
| GAAP net income | $118.1 million | $239.0 million in Q1 2018 |
| Net income available to common shareholders; diluted EPS | $100.8 million; $0.54 | $229.6 million; $1.22 in Q1 2018 |
| Core earnings (non-GAAP); per basic share | $106.1 million; $0.57 | $108.8 million; $0.58 in Q1 2018 |
| Economic net interest income and spread (non-GAAP) | $151.3 million; 2.1% | $145.4 million; 2.5% in Q1 2018 |
| Net interest margin (non-GAAP) | 2.4% | 3.0% in Q1 2018 |
| Cash and cash equivalents | $122.9 million | $47.5 million at December 31, 2018 |
| Total assets; stockholders’ equity | $29.34 billion; $3.95 billion | $27.71 billion; $3.70 billion at December 31, 2018 |
| Debt and leverage | $23.60 billion; GAAP leverage 6.0:1, recourse leverage 3.9:1 | $22.65 billion; 6.1:1 and 3.8:1, respectively, at December 31, 2018 |
| Book value per common share | $16.15 | $15.90 at December 31, 2018 |
| Common dividend declared | $0.50 per share | $0.50 per share in Q1 2018 |
Performance, changes, and capital
- Common net income fell by $128.9 million year over year, chiefly reflecting a $204.6 million net derivative loss in Q1 2019 versus a $94.5 million gain in Q1 2018. The 2019 result included a $108.0 million realized loss on terminating $1.5 billion notional of interest-rate swaps. Higher unrealized gains on financial instruments partly offset the derivative losses.
- Interest income rose 18% year over year, mainly as average Agency MBS balances increased. Interest expense rose 36%, reflecting more Agency MBS repurchase financing and higher rates. Economic net interest income increased modestly, but the spread narrowed 40 basis points year over year.
- Management reported that falling medium- and long-term rates supported asset values during the quarter, while hedge losses partly offset those gains. Book value per common share increased to $16.15.
- At quarter-end, interest-earning assets were $27.18 billion, excluding cash; portfolio mix by amortized cost was approximately 46% loans, 47% Agency MBS, and 7% Non-Agency RMBS. Fixed-rate assets represented 95.8% of the portfolio.
- Operating cash flow was negative $62.2 million, investing cash flow negative $880.8 million, and financing cash flow positive $1.02 billion. Operating cash use included swap-termination payments and derivative margin. Repurchase agreements increased to $15.32 billion.
- In January, Chimera issued 8 million Series D preferred shares, generating $193 million net proceeds. The shares pay an 8% fixed dividend through March 2024, then float at three-month LIBOR plus 5.379%, subject to their terms. The company declared $94 million of common dividends during the quarter.
Outlook, risks, and contingencies
- Management outlook: Management said it would continue seeking high-yielding investments while managing risk and pursuing a durable dividend. It cited a patient Federal Reserve stance, declining mortgage rates and continued housing-market strength, but cautioned that a persistently flat yield curve could pressure spreads. The filing provides no numerical earnings or return guidance.
- Liquidity and funding: Management considered cash and liquid Agency securities adequate for anticipated near-term needs, but warned that falling collateral values could prompt margin calls and create temporary liquidity shortfalls. Most repurchase financing is short-dated; $6.46 billion matured within 1–29 days and $4.90 billion within 30–59 days at quarter-end. Renewal terms and access to financing depend on market conditions.
- Interest-rate and valuation exposure: The company uses swaps, swaptions, and Treasury futures, but hedges may not fully offset rate moves. Its disclosed sensitivity model estimated annual economic net interest income would decline 10.64% under a 50-basis-point rate increase and 25.73% under a 100-basis-point increase; actual results could differ materially. Significant Level 3 assets rely on management assumptions and models.
- Credit and collateral: Residential loans had 17.4% of unpaid principal balance in the reported delinquency, bankruptcy, foreclosure, or REO categories, versus 16.8% at year-end. Non-Agency RMBS carry meaningful credit risk; 92.3% were rated below B or unrated. Loan defaults, losses, prepayments, and home-price movements can affect income and fair value.
- Commitments and contingencies: Unfunded construction-loan commitments were $1.2 billion, primarily expected to be paid within one year. Of a $150 million Hains Point fund commitment, $48 million had been funded; capital calls require company approval. Certain resecuritizations include obligations to repurchase assets if specified representations and warranties are breached. The company reported no material legal proceedings and no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- Whether the non-GAAP core earnings and economic spread measures reconcile to GAAP results as presented and remain useful indicators given the large derivative valuation and termination effects.
- How repurchase funding renewals, collateral haircuts, margin requirements, and derivative collateral needs evolve, particularly under adverse market conditions.
- Whether loan delinquency trends and credit losses affect the carrying values of loans and Non-Agency RMBS, including assets valued using Level 3 inputs.
- The remaining funding schedule and conditions for the $1.2 billion construction-loan commitments and the unfunded Hains Point commitment.
- The sustainability of the $0.50 common dividend relative to taxable income, cash generation, financing costs, and the senior claims of preferred stock.