Chimera Investment Corporation — 2021 Form 10-K
Business context and reporting period. Chimera is an internally managed mortgage REIT investing primarily in residential mortgage loans and mortgage-backed securities, using leverage and securitizations to earn net interest income. This filing covers the fiscal year ended December 31, 2021; quarterly figures below highlight the fourth quarter. Financial statements are presented under U.S. GAAP. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Key financial metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Interest income | $937.5 million | $1,030.3 million |
| Interest expense | $326.6 million | $516.2 million |
| Net interest income | $610.9 million | $514.1 million |
| GAAP net income | $670.1 million | $88.9 million |
| Net income available to common shareholders | $596.4 million; $2.55 basic EPS | $15.1 million; $0.07 basic EPS |
| Earnings available for distribution (non-GAAP) | $429.0 million; $1.78 per adjusted diluted share | $333.7 million; $1.46 per adjusted diluted share |
| Cash from operating activities | $519.2 million | $257.9 million |
| Cash and cash equivalents at year-end | $385.7 million | $269.1 million |
| Total assets / stockholders’ equity | $15.4 billion / $3.7 billion | $17.5 billion / $3.8 billion |
| Interest-bearing debt at year-end | $11.1 billion | $13.5 billion |
| Debt-to-equity / recourse leverage | 3.0:1 / 0.9:1 | 3.6:1 / 1.2:1 |
| Common dividends declared per share | $1.29 | $1.40 |
Margins. For 2021, the company reported a 3.9% economic net interest rate spread and a 4.2% economic net interest margin, compared with 2.3% and 2.8%, respectively, in 2020. These are non-GAAP measures. Average interest-earning assets declined to $14.4 billion from $18.3 billion, while average interest-bearing liabilities fell to $12.2 billion from $15.8 billion.
Cash flow and liquidity. Investing activities provided $2.5 billion and financing activities used $3.0 billion in 2021. Cash increased by $116.7 million. The company reported $1.2 billion of non-mark-to-market financing arrangements intended to reduce exposure to margin calls, and $976 million of unused, uncommitted warehouse capacity. It stated that its assets and borrowing arrangements were expected to cover anticipated short-term liquidity needs, subject to market and financing conditions.
Portfolio. At year-end, approximately 82% of interest-earning assets by fair value were residential mortgage loans, 12% Non-Agency RMBS and 6% Agency MBS. The portfolio remained predominantly fixed-rate. Loans held for investment were reported at $12.3 billion fair value; Non-Agency RMBS at $1.8 billion and Agency MBS at $60.5 million, with Agency CMBS at $761.2 million.
Fourth-quarter and year-over-year changes
- Fourth-quarter net interest income was $154.6 million, versus $115.9 million in Q4 2020. GAAP net income was $17.7 million, but net income available to common shareholders was a loss of $0.7 million after preferred dividends; basic EPS rounded to $(0.00). Q4 2021 earnings available for distribution was $110.6 million, or $0.46 per adjusted diluted share.
- Full-year common earnings improved substantially from 2020, supported by higher asset values, lower funding costs, improved spreads and no derivative losses in 2021. Net unrealized gains on financial instruments were $437.4 million, compared with losses of $110.7 million in 2020.
- Interest income fell 9%, largely reflecting a smaller average asset base following the 2020 portfolio reductions. Interest expense fell 37%, reflecting lower balances and funding rates, including refinancing higher-cost securitized debt.
- The portfolio shifted further toward loans: residential mortgage loans rose to about 82% of interest-earning assets from 77%; Agency MBS fell to 6% from 10% and Non-Agency RMBS to 12% from 13%.
- Book value per common share declined to $11.84 from $12.36. The company attributed the decline to higher short-term rates and modestly wider credit spreads. Common dividends declared declined to $1.29 per share from $1.40, although management said the quarterly dividend was increased 10% to $0.33 beginning in Q2.
Outlook, risks and unusual items
- Strategy and outlook: Chimera acquired or committed to acquire approximately $3.2 billion of residential mortgage loans during 2021, including seasoned reperforming loans, business-purpose loans, prime jumbo loans and Agency-eligible investor loans. It called 13 loan securitizations and issued 10 new ones; management reported that new securitizations lowered average debt cost to about 2.1% from 4.4% on called debt. The filing provides no specific company earnings or dividend guidance.
- Rates and funding: Management discussed persistent inflation, the Federal Reserve’s late-2021 policy shift and market expectations for rate increases in 2022. Rising short-term borrowing costs, curve compression, asset-value declines, refinancing needs and margin calls could pressure earnings and liquidity. Chimera held no interest-rate hedges at December 31, 2021. Its modeled +100-basis-point parallel rate shock projected a 5.46% decrease in net interest income and a 7.17% decrease in asset market value; actual effects may differ.
- Credit and valuation: The portfolio has significant exposure to credit-risk assets, including subordinate and illiquid securities and seasoned loans. Borrower defaults, prepayments, collateral values and geographic concentration can affect returns. Approximately 93% of recurring fair-value assets were Level 3 at year-end, involving significant management assumptions. The auditor identified Level 3 valuation and interest-income estimates as critical audit matters.
- Unusual items: The company recorded a $283.6 million GAAP loss on extinguishment of debt, primarily from acquiring and refinancing securitized loan debt, and a $221 million cash settlement of warrants. The 2021 result also reflects $437.4 million of unrealized fair-value gains. These items make GAAP earnings less representative of recurring income; the company’s non-GAAP earnings available for distribution is not taxable income or a guarantee of dividends.
- Other risks and contingencies: COVID-19 and variants, servicing and regulatory developments, LIBOR transition, counterparty and cybersecurity risks, REIT qualification and maintaining an exemption from the Investment Company Act could adversely affect operations. The company disclosed repurchase obligations for certain securitization representation-and-warranty breaches; it reported no legal proceedings and no subsequent events. LIBOR-related contracts may require transition after June 30, 2023.
Important facts for investors to verify
- Reconcile GAAP net income with earnings available for distribution and REIT taxable income; assess dividend coverage and the sustainability of the $0.33 quarterly common dividend.
- Review credit performance, delinquency trends, expected losses and geographic concentrations in the loan and Non-Agency RMBS portfolios, including the impact of first-loss retained securities.
- Examine the assumptions supporting Level 3 valuations and cash-flow estimates. At year-end, company model values exceeded third-party prices by $97 million for three loan pools and by $8 million in aggregate for seven investment holdings.
- Assess debt maturities, refinancing access, collateral haircuts, uncommitted financing availability and exposure to margin calls as rates and spreads change.
- Track LIBOR-to-replacement-rate conversion, hedging plans, and the potential effect of rising short-term rates on funding costs and book value.