Chimera Investment Q1 2023 Earnings Call Transcript

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May 4, 2023

Key Takeaways

  • Chimera committed to purchase $1.25 billion of diversified mortgage loans, completed three securitizations, reduced recourse leverage by $237 million, and achieved a 2% total economic return in Q1.
  • Extreme rate volatility led to approximately $34 million of realized losses on derivatives, causing book value per share to decline by $0.08 (about 1%).
  • Since quarter end, Chimera completed four additional securitizations—one closing today—further cutting recourse leverage by $400 million and eliminating reperforming loan warehouse exposure.
  • Q1 net interest spread was 1.4%, with yield on assets at 5.5% versus a funding cost of 4.1%, resulting in $31 million of earnings available for distribution ($0.13 per share).
  • The company ended the quarter with $660 million of cash and $1.6 billion of non–mark-to-market repo capacity, providing ample liquidity for future investments and refinancings.
AI Generated. May Contain Errors.
Earnings Conference Call
Chimera Investment Q1 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Chimera Investment Corporation First Quarter 2023 Earnings Call. All lines have been placed on a listen only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Victor Falvo, Head of Capital Markets. Sir, the floor is yours.

Speaker 1

Thank you, operator, and thank you, everyone, for participating in Chimera's 1st Quarter 2023 Earnings Conference Call. Before we begin, I'd like to review the Safe Harbor statements. During this call, we will be making forward looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward looking statements.

Speaker 1

We encourage you to read the forward looking statement disclaimer in our earnings release in addition to our quarterly and annual filings. During the call today, we may also discuss non GAAP financial measures. Please refer to our SEC filings and investor presentation for reconciliation to the most comparable GAAP measures. Additionally, the content of this conference call may contain time sensitive information that is accurate only as of the date of this earnings call. We do not undertake and specifically disclaim any obligation to update or revise this information.

Speaker 1

I will now turn the conference over to our Chief Executive Officer, Phil Cardes.

Speaker 2

Thanks, Vic. Good morning, and welcome to Chimera Investment Corporation's First Quarter 2023 Earnings Call. Joining me on the call are Chaudhry Narlagadda, our President and Co Chief Investment Officer Dan Thacker, our Co Chief Investment Officer Subra Viswanathan, our Chief Financial Officer and Vik Falvo, our Head of Capital Markets. After my remarks, Subra will review the financial results and then we'll open the call for questions. The Q1 took us on quite a ride.

Speaker 2

Some would say like a roller coaster, I would say it was more like the slingshot ride at Coney Island. Despite the volatility, we accomplished quite a lot. We committed to purchase $1,250,000,000 of diversified mortgage loans, Completed 3 securitizations, reduced recourse leverage by $237,000,000 and generated a 2% total economic return. And since the quarter ended, we have completed 4 securitizations, including a securitization we expect to close later today and reduced our recourse leverage by a further $400,000,000 including reducing our reperforming loan warehouse exposure to 0, all in a very challenging environment. Let's do a quick review of what happened during the quarter.

Speaker 2

The quarter started with the market expecting a recession by mid year based on December economic data. We saw rates moderate, Our book value increase and the securitization market began to open up. The Fed responded as expected on February 1 by slowing the pace of rate hikes to 25 basis points. Then on February 3rd, we were whipped in the opposite direction when the January employment report showing ordinary job growth coupled with upward revisions to last year's jobs data. The news continued in the same direction with increased consumer spending and both headline and core inflation increasing in January.

Speaker 2

In response to this data, Chairman Powell's statement before Congress on March 7 was quite hawkish, raising the possibility that the Fed will revert to larger rate hikes and at the peak rate and the cycle would be higher than previously thought. Soon after his testimony, the July Fed Soon after his testimony, the July Fed Funds futures contract yield increased to 5.59 And the market expected that rate to remain throughout the year. Then 2 days later, it was clear Silicon Valley Bank was in deep trouble. The next day it was put into receivership by the FDIC and Signature Bank failed over the weekend. The future of Credit Suisse was also overhanging the market.

Speaker 2

This set off a period of significant volatility in the rates market. The immediate concern was that the other regional banks would fail or would need government The markets responded over the next 10 days with the July Fed funds contract rallying by 110 basis points. Market expectations shifted to easing by the Fed in July and the expected Fed funds rate dipped below 4% by year end. With both the FDIC and the Fed providing liquidity facilities for the banks, things began to come. Data released in March showed the labor market remains strong and inflation remained high.

Speaker 2

The Fed responded with the business as usual rate hike of 25 basis points and new dot projections show that a majority of the Fed officials still expected the peak funds rate to be 5.8%. The market on the other hand continued to disagree and had priced in rate cuts later in the year. Yesterday, the but also said that their inflation projections did not support a rate cut this year, higher for longer. The slingshot changes we experienced during the quarter created some unforeseen challenges. The heightened rate of volatility and spread widening that occurred impacted the timing and the execution of the of the securitizations of the loans we committed to purchase early in the quarter.

Speaker 2

The extreme rate volatility also had a negative impact on our longer dated hedge instruments, resulting in approximately $34,000,000 of realized losses on derivatives for the period. The net result of this volatility is that while our while the value of our assets increased during the quarter, our book value per share decreased, but by only $0.08 or about 1%. The net change in book value plus the $0.23 dividend paid in the Q1 resulted And a 2% total economic return for the period. We believe this demonstrates the strength and resiliency of our loan portfolio. Now let me take you through our business activities for the quarter.

Speaker 2

In January, Chimera issued its call rights or exercised its call rights and terminated 4 existing securitizations and then issued a $586,000,000 SemTrust 2023 R1 $137,000,000 SymTrust 2023 NR1. This re securitization enabled us to shift $150,000,000 from recourse borrowings into securitized debt, while receiving about $90,000,000 in cash. Our average cost of debt on the re securitization was 6.66%. Both securitizations are callable within 2 years, which gives us the ability to refinance the securitized debt As we began the quarter, we had $168,000,000 of recourse financing with Credit Suisse and we knew that they were exiting the business. The relever included bonds we had previously financed with CS and the net cash provided time and the opportunity for us to new credit facilities to replace CS.

Speaker 2

We were successful in our efforts, which enabled us to reinvest the proceeds from the re levers. Like any other form of equity raise, there is a lag effect on earnings until the new funds are fully deployed. As discussed in our prior earnings call, during the quarter, we committed to purchase approximately $1,250,000,000 of mortgages. Of the total commitments, approximately 57% were seasoned re performing loans, 39% were non qualified investor mortgage loans, and the remainder were business purpose loans. With the exception of the business purpose loans, all loans were purchased with The intention to finance over the long term through securitization.

Speaker 2

The loan characteristics of the seasoned RPLs And BPLs were consistent with the characteristics which currently exist in our portfolio. In March, we sponsored SIM 2023 R2, a rated securitization of seasoned re performing residential mortgage loans having balance of $447,000,000 Securities issued in CEM 2023 are 2 with an aggregate balance Approximately $365,000,000 were sold in private placements to institutional investors. These senior These securities represent approximately 82% of the capital structure. We retained a subordinate interest in certain interest only securities with an aggregate balance of approximately $83,000,000 for investment. Our average cost of debt on this securitization is 5.95%.

Speaker 2

We retained an option to call the securitized mortgage loans at any time beginning in March 2028. We continued our securitization activities post quarter. In April, we sponsored SemTrust 2023 I1, rated securitization of non QM investor mortgage loans having a principal balance of $236,000,000 We also exercised call rights and terminated 2 existing securitization trusts and then issued a 451,000,000 SemTrust 2023 R3 and a $67,000,000 SemTrust 2023 NR2. This re securitization enabled us to shift approximately $150,000,000 from recourse borrowing to securitize debt, while receiving about $40,000,000 in cash. Finally, we priced SemTrust 2023 are for a rated securitization of seasoned re performing residential mortgage loans, and we expect that transaction will close later today.

Speaker 2

The mortgage loans included loans we committed to purchase in January as well as RPLs we had on warehouse. And upon closing the transaction, our RPO warehouse exposure will be reduced to 0. We currently expect to close the remaining quarter, we remain optimistic about our future. We believe our continued ability to execute on loan purchases and securitizations highlights the overall strength of Chimera's franchise value. Our seasoned re performing loan portfolio continues to perform well from Credit perspective, our recent EAD challenges are primarily related to our cost of financing, not the credit quality of our portfolio and not the income generated by the portfolio, which is down marginally over the past year.

Speaker 2

We note that once rates moderate and begin their decline, over time. Currently, we have 14 seconduritizations that are callable this year. The timing on calling these securitizations depends on a factors, including the amount of equity to be extracted, new investment opportunities available, the cost of new senior securitized debt and the overall impact on our balance sheet and income statements. We continue to view this ability to extract equity from our investments as a key differentiator for amongst its peers and can be a significant source of capital for redeployment. We believe our assets are very strong and the company is well positioned when rates begin to moderate.

Speaker 2

We continue to and accretive opportunities in prime jumbo loans, RPLs, non QMs, BPLs as well as Agency RMBS. While our focus for the past few years has been on RPLs, we expect to continue to diversify our investments over time. We understand the road ahead is not smooth, but new investment opportunities look attractive and we remain optimistic about our future. We have a great team, outstanding assets and a clear vision. I would now like to turn to Subra to give a more detailed overview of our financial results.

Speaker 3

Thank you, Phil. I will review Chimera's financial highlights for the Q1 of 2023. GAAP book value based on quarterly change in book value and the 1st quarter dividend per common share. GAAP net income for the Q1 was 39,000,000 or $0.17 per share. On an earnings available for distribution basis, net income in the Q1 of approximately $31,000,000 or of $0.13 per diluted common share.

Speaker 3

Our economic net interest income for the Q1 was $69,000,000 For the Q1, The yield on average interest earning assets was 5.5%. Our average cost of funds was 4.1% and our net interest spread was 1.4%. Total leverage for the Q1 was 4.1:one, while Rico's leverage ended the quarter at 1.2:one. For financing and liquidity, the company had $660,000,000 total cash on unencumbered assets at quarter end. We had $1,600,000,000 of either non or limited mark to market features on our outstanding repo agreements.

Speaker 3

We had $2,500,000,000 floating rate exposure on our outstanding repo liabilities. We had $1,000,000,000 pay fixed interest rate swap to pay fixed for 1 year beginning in March 2024 at an average rate of 3.46% as a hedge position for liabilities. The company also had $450,000,000 outstanding short futures contracts to hedge loans for future securitizations. For the quarter, our economic net interest income, return on equity was 10.5% and our GAAP return on average equity was 8.6%. And lastly, our Q1 2023 expenses, excluding servicing fees and transaction expenses,

Speaker 1

Operator, we're ready for our questions.

Operator

I apologize for that. And our first question comes from Doug Harter of Credit Suisse. Please go ahead.

Speaker 4

Thanks. Hoping you could talk about how you're thinking about the dividend given Kind of current earnings power and your outlook for earnings kind of once kind of All of the freed up capital is redeployed.

Speaker 2

Hi, Doug. This is Phil. We recognize that our current dividend exceeds our EAD. But as we said earlier, we believe our portfolio is strong and it's positively positioned when rates begin to decline. We also believe that we'll see Investments come to the market, but on the other hand, we note that REIT volatility in the subsequent dislocations in the banking sector, Possibly a banking crisis is creating a great deal of uncertainty around the future.

Speaker 2

And so while we remain positive, we're going to be keeping our Eyes on these kind of developments.

Speaker 4

Got it. And given that it's Kind of uncertain as to when rates decline, kind of whether you believe Q3 versus the same shot. I guess, how are you thinking about how long or how far out into the future you kind of look on kind of the earnings power versus kind of maybe preserving some of that capital for investment opportunities?

Speaker 2

Yes. I think you actually said it exactly how we're thinking about it. As I mentioned, with the Portfolio still stays strong. Our top line revenue is still staying strong. Our financing costs Obviously, what's hurting.

Speaker 2

And we'll be looking at how long that lasts, what our Actual investment opportunities are and where the market is and we'll be constantly juggling those things to come to a view. As you said right now, there's a fair amount of uncertainty. And so, we'll be looking at all that and come to the right balance, which we think will be in the best interest of shareholders.

Speaker 5

Okay. Thank you.

Operator

Our next question is from Trevor Cranston of JMP Securities. Please go ahead.

Speaker 6

Hi, thanks.

Operator

Can you talk a little bit

Speaker 6

about The potential opportunities you're seeing coming out of the bank portfolios on the whole loan side And how much free capital do you feel you have available to potentially take advantage of Any opportunities like that or if you might be willing to increase leverage in the near term if a significant opportunity comes to market? Thanks.

Speaker 2

I'll start with that and just saying, look, as we mentioned, we have 14 seconduritizations that are callable and we'll look at the facts and circumstances Some of them are investment opportunities. We could look at leverage other sources of capital As to the kinds of things that we're seeing and we think I'm going to turn this over to Dan Thacker, our Co Chief Investment Officer.

Speaker 7

Yes. Hi, this is Dan Thacker. If your question is regarding this FDIC liquidations, the majority of that's in the agency RMBS. At this point, the stance that we have taken is even though spreads are pretty wide, we think given the negative technicals in the Agency RMBS market, We think spreads can stay here and don't see an imminent catalyst for tightening. So as Phil said, right now, what we are trying to do is deploy The capital to the extent they become available in non QM as well as RPL.

Speaker 7

Does that answer your question?

Speaker 6

Yes, that's helpful. Thanks. And then on the warehouse financing side, can you guys just give some general market color in terms of If you've seen any changes or impact to the warehouse market in light of the banking issues and volatility that we've Over the last couple of months.

Speaker 2

We have not seen any impact as of currently.

Speaker 6

Okay. Thank you.

Operator

Our next question is from Bose George of KBW. Please go ahead.

Speaker 2

Hey, guys. Just one for me. What's your given update for book value quarter to date? We think it's relatively unchanged. Okay, great.

Speaker 2

That's all I had. Thanks.

Operator

Our next question is from Eric Hagen of BTIG. Please go ahead.

Speaker 5

Good morning. You've got Ethan on for Eric. Just a couple for me and I joined a couple of minutes late, so apologies if you already answered these. But Is there a market yield you would estimate for the loan portfolio? And how does that compare to the yield on your cost basis?

Speaker 3

Well, the yield that on a cost basis we have it in our sorry, this is Subra Viswanathan. The yield we have is The overall portfolio we have is 5.5 percent and then most of it obviously is the loans. That's on the cost basis. On the market yield, I mean, it's just very maybe Dan or Chodorri can talk about the market yield. It really depends on the asset class between RPL and non QM investor loans, Which is what we've been trending recently.

Speaker 7

Yes. So if the question is around the unlevered yields in the non QM, We see the current coupon close to around 8%.

Speaker 5

Got it. That's really helpful. Last one for me. Should investors expect you to buy defaulted loans out of the securitization trust in your debt deals? Or is the idea to have loans in the trust Until a resolution and more generally, what kind of liquidity could you need to support your delinquent pipeline?

Speaker 2

Okay. Generally speaking, this is Phil. Generally speaking, the only time you would need to buy back on our securitizations for Certain breaches of rep and warranties. So if a loan becomes delinquent, then we expect the servicer to Engage in loss mitigation techniques. For certain of our securitizations, we actually have an asset manager who sits over top And provide support to them.

Speaker 2

And to the extent that the loan goes into foreclosure and the REO, Then it's just liquidated within the trust.

Speaker 5

Great. That's helpful. That's all for me.

Speaker 2

All right. Thank you.

Operator

There are no further questions at this time.

Speaker 2

All right. This is Phil Cardes. Thank you for joining us on this This is a 2023 Q1 earnings call and we look forward to speaking to you

Speaker 5

later this year.

Operator

And thank you. This concludes today's conference. We thank you for your participation. You may disconnect your lines at this time and have a great day.

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