Chimera Investment Q3 2024 Earnings Call Transcript

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November 6, 2024

Key Takeaways

  • Management highlighted the Federal Reserve’s recent 50 bp rate cut and a newly steeper yield curve as tailwinds that should lower funding costs and boost future performance.
  • In Q3, Chimera closed a $468 million seasoned-RPL securitization (SIM 2024R1) and issued $75 million of 9.25% unsecured notes, diversifying its capital structure beyond repurchase agreements.
  • The company deployed capital into its core strategy—committing $118 million of residential transition loans and purchasing $47 million of non-agency subordinate bonds at discounts—targeting mid- to high-teens levered returns.
  • Chimera signed a definitive agreement to acquire the Palisades Group, adding proprietary analytics and a fee-based asset management platform to create over $30 billion of combined loan and REO AUM, with expected accretion in 2025.
  • Q3 GAAP net income was $113.7 million ($1.39/share), book value reached $22.35/share, economic ROE was 6.8% for the quarter (15.6% YTD), and the dividend was raised 12% over two quarters.
AI Generated. May Contain Errors.
Earnings Conference Call
Chimera Investment Q3 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Greetings and welcome to the Chimera Investment Corporation Third Quarter Earnings Call. Time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Victor Falvo, Head of Capital Markets.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator, and thank you, everyone, for participating in Chimera's Q3 2024 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 disclaimers in our earnings release and our quarterly and annual filings. During the call today, we may also discuss non GAAP financial measures. Please refer to our SEC filings and earnings supplement for reconciliation for 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 President and Chief Executive Officer, Philip Laportis.

Speaker 2

Thanks, Vic. Good morning, and welcome to the Chimera Investment Corporation's Q3 2024 Earnings Call. Joining me on the call are Subra Viswanathan, our Chief Financial Officer Dan Thacker, our Chief Investment Officer and Vic Falvo, our Head of Capital Markets and Investor Relations. After my remarks about the quarter, I will briefly discuss our recent acquisition announcement and then Subho will review the financial results before opening the call for questions. After a prolonged period of rising rates and higher for longer, inflation abated to a point where the Federal Reserve is more concerned about a softening labor market.

Speaker 2

In September, the Fed cut the funds rate by 50 basis points and provided guidance for another 50 basis point reduction by year end. Market reacted by pricing in a more rapid interest rate decrease than projected by the Fed. The yields on U. S. Treasury notes ended the quarter materially lower with the yield difference showing a positive slope from the 2 years out to the 10 years for the first time since the middle of 2022.

Speaker 2

We believe achieving a lower short term funding cost and a steeper yield curve environment will be beneficial for our future operating performance. Since the beginning of Q4, treasury yields have risen with the change in market sentiment mostly due to a stronger economic data and concerns over trade and the federal deficit. As the market has adjusted, we expect one more and maybe a second rate cut this year, but expect further Fed cuts to be in a smaller 25 basis point increments. Housing fundamentals remain strong for residential mortgage credit. Home prices are higher by approximately 5% on a year over year and delinquencies and default rates remain low.

Speaker 2

While existing home inventories have increased recently and are at their highest level in the past 4 years, they are in line with pre pandemic levels. On a more macro level, the housing supply shortage should continue to support home prices, albeit at a slower pace moving forward. Investor demand for mortgage credit securities remained strong. Non agency RMBS issuances for 2024 may reach $100,000,000,000 which would be approximately 40% greater than in 2023. While credit spreads in the residential market have tightened significantly since the beginning of the year, continue to remain attractive relative to the investment grade and high yield corporate bond markets.

Speaker 2

We believe market conditions align well with our residential credit strategy. In July, we sponsored SIM 2024R1, a $468,000,000 securitization of seasoned RPLs. We sold securities in a private placement with an aggregate balance of approximately $352,000,000 or 75 percent of the capital structure. We retained approximately $116,000,000 investment in subordinate bonds and certain IO securities. Our weighted average cost of the debt sold was 5.7%.

Speaker 2

In August, we issued $75,000,000 of 9.25 unsecured notes due August 15, 2029, which are callable beginning in August of 2026. This was our 2nd unsecured bond offer for the year, resulting in a combined total issuance of 140,000,000 dollars While we continue to favor repurchase agreements and securitized debt as lower cost source of financing for our loans, the ability to issue unsecured debt helps us to further diversify our capital structure and invest in new and accretive assets. Upon the issuance, we produced and settled on $43,000,000 agency CMOs. We expect that the levered return on this investment will be accretive to earnings and more than exceed our cost of the debt. These investments provide attractive returns and a source of capital as we seek to make future investments in residential loans and credit securities.

Speaker 2

Over the course of the quarter, we purchased and settled on approximately 47,000,000 dollars of non agency subordinate bonds from newly issued mortgage securitizations, backed by collateral that included RPLs and small balance commercial properties. We purchased these investments at a discount to their par values and expect to achieve mid teen returns. This quarter, we also committed to purchase $118,000,000 of residential transition loans, and we expect to close these loans during the Q4. These loans have characteristics like residential transition loans we have purchased in the past. We will use leverage through our warehouse facilities for these loans and expect to achieve levered return in the mid to high teens.

Speaker 2

As we announced a couple of weeks ago, we signed a definitive agreement to acquire the Palisades Group, which is an alternative asset manager and residential mortgage credit based in Austin, Texas. Palisades provides asset management and servicer and vendor oversight services to 3rd parties as well as manages third party funds in residential credit space. Like the team here at Chimera, the Palisades Group has a successful history of analyzing and investing in residential mortgage credit. We were particularly impressed by their ability to perform deep asset level analysis, review borrower credits and perform high quality data and monitoring of loans. These capabilities overlap quite well and complement Chimera's existing business.

Speaker 2

Also Palisades brings to us a proven suite of proprietary technologies and when combined with our own in house capabilities will improve upon our strengths in both portfolio and credit risk management. Palisades acquisition is complementary and enables us to provide a new fee based asset management service for 3rd parties that would like to invest in residential mortgage credit. When completed, on a combined basis, Chimera and Palisades will have over $30,000,000,000 of notional value in loans and real estate owned, advised or managed. This benefits Chimera as it will increase the depth and breadth of our residential credit expertise while adding strong partnerships with already established investment management and insurance companies. We're excited about this transaction and expect it to close in the Q4.

Speaker 2

We believe we'll achieve accretive benefits from this acquisition in 2025. And finally upon closing, Jack McDowell, the Co Founder and Chief Investment Officer of Palisades will become Chimera's new Chief Investment Officer. So what does this mean for Chimera's shareholders? We feel good about our business. We're finding new opportunities and we've increased the quarterly dividend by 12% over the past 2 quarters.

Speaker 2

And as we approach the end of 2024, the Federal Reserve has lowered short term interest rates by 50 basis points and as indicated lower short term rates may be on the horizon. Residential credit markets are robust, which aligns with our business strategy. We've established a new source of unsecured funding through the capital markets, and we believe the acquisition of Palisades will further strengthen and expand our existing business and provide additional opportunities for growth. Over the balance of the year, we'll work diligently to close this acquisition. The team at Chimera has a long and successful history of buying and securitizing residential credit assets.

Speaker 2

And with the acquisition of Palisades, we will increase and broaden our existing capabilities and add a new fee based third party investment management business. We're working hard for our shareholders and we'll continue to seek ways to position the company to achieve the best possible results over the long term. I will now turn the call over to Subra to review our quarterly financial results.

Speaker 3

Thank you, Phil. I will review Chimera's financial highlights for the Q3 of 2024. GAAP net income for the 3rd quarter was $113,700,000 or $1.39 per share. GAAP book value at the end of the 3rd quarter was $22.35 per share. For the 3rd quarter, our economic return on GAAP book value was 6.8 percent based on the quarterly change in book value and the 3rd quarter dividend per common share.

Speaker 3

And year to date 2024, our economic return on GAAP book value was 15.6%. On an earnings available for distribution basis, net income for the Q3 was $29,900,000 or $0.36 per share. Our economic net interest income for the Q3 was $71,500,000 For the Q3, the yield on average interest earning assets was 6.1%, our average cost of funds was 4.5%, and our net interest spread was 1.6%. Total leverage for the Q3 was 3.9:one, while Rico's leverage ended the quarter at 1.2:one. For financing and liquidity, the company ended the quarter with $648,000,000 in total cash and unencumbered assets.

Speaker 3

For hedging, we had $2,500,000,000 floating rate exposure on our outstanding repo liabilities. We had $1,500,000,000 pay interest rate swaps at a weighted average fixed pay rate of 3.56 percent as a hedge position for our floating rate liabilities. The company also has a long position in 500,000,000 1 year swaption on a 1 year pay fixed interest rate swap with a blended rate of 3.45%. We had 1,400,000,000 in either non or limited mark to market features on our outstanding repo agreements representing 43% of our secured recourse funding. As Phil mentioned, we closed our SIM 2024 R1 securitization during the Q3.

Speaker 3

As part of our strategy to mitigate securitization execution risk on certain securitizations, we closed out $307,000,000 of short 5 year treasury futures contract position to protect the net interest spread of SIM 2024R1. For the Q3 of 2024, our economic net interest income return on equity was 10.6%. Our GAAP return on average equity was 20.3%. Our EAD return on average equity was 6.8%. Also for the Q3, the company increased the common stock dividend to $0.37 per share, up from $0.35 in Q2 $0.33 in Q1.

Speaker 3

And lastly, for the Q3 2024 expenses, excluding servicing fees and transaction expenses were $12,800,000 down modestly from the Q2. That concludes our remarks. We will now open the call for questions.

Operator

Thank you. We will now be conducting a question and answer Our first question

Speaker 4

You talked a lot about some of the opportunities you guys are seeing on the loan side. One thing we've heard from some of the non bank originators recently is a focus on trying to grow home equity lending. I was wondering if you could talk about kind of what you guys are seeing there and if you think that's a potential opportunity for Chimera to participate in the future? Thanks. Yes.

Speaker 4

I think

Speaker 2

Palisades has got some experience in. And, that Palisades has got some experience in and it's an area that we are looking at pretty closely. It just hasn't worked for us right now, but we've heard the same things and we're seeing things that are interesting. We just haven't found something yet

Speaker 4

to pull the trigger on. Okay, got it. And then in terms of the overall interest rate exposure or net duration of the portfolio, could you say where that was at September 30? And also maybe provide an update on book value given the movement rates in the Q4 so far? Thanks.

Speaker 2

So I'm going to on the book value, I'm going to turn that over here in just a second to Dan Thacker. But on the other part, it's something that we haven't traditionally made public. But let me let Vic address kind of where we think book value has gone since the end of the quarter. I mean, excuse me Dan.

Speaker 5

Yes, so the sell off in the race market getting more pronounced at the same as we all saw, like the intermediate treasuries that we raised all gains that they gain in the quarter plus some. So I would say versus quarter end, we are flat this morning, Trevor.

Speaker 4

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Doug Harter with UBS. Please proceed with your questions.

Speaker 6

Thanks. Just a follow-up on that. When you say, you're flat

Speaker 4

from the end

Speaker 6

of the quarter, I guess what are you comparing that timeframe to just to make sure we're on the same page?

Speaker 5

So the book value as of end of ninethirty versus the move today, That's what we're looking

Speaker 2

at.

Speaker 4

Okay. Great.

Speaker 6

And can you just talk about with the acquisition of Palisades, kind of how you think about kind of growth in kind of broadly defined AUM, how you would think about whether you want that to kind of be on balance sheet for Chimera versus kind of 3rd party funds and how you

Speaker 2

would look to balance that? Sure. So right before I answer, I just want to make sure to clarify. I think what we meant to say on the book value is we've given up most or nearly all of the gains that we showed at the end of the Q3 prior relative to the end of the Q2. So most of that

Speaker 6

So that would be more flat with the second flat,

Speaker 4

that was the June? Yes. Okay. That's correct. Thank you.

Speaker 4

Okay.

Speaker 2

On Palisades, that is something we are working through in terms of how we're going to think about 3rd party asset management in the fund business. We will develop a pretty detailed allocation policy that will be that will work well for Chimera shareholders and any limited partners and any future funds that we create through that. That's a kind of an early stage business for them and we'll look to grow that, but we'll look to grow it in a way that's beneficial for all parties. And then as I said, their 3rd party asset management is an interesting business and to the extent we'll look to grow that as well and they have capabilities both investment and collateral management that we'll find useful on our own portfolio.

Speaker 6

I appreciate that. And then just one more on interest rate exposure. How do you think about your kind of earnings EAD exposure to the short end? And I know you updated your swap positions, but just how to think about your kind of your net interest spread or earnings sensitivity to lower short term rates or a steeper curve?

Speaker 3

Hey, Doug. This is Subra. Thanks for the question. I mean, the way to think about it is EAD will react both positively and significantly. So if you think about our floating rate liabilities at the end of the quarter, that was about $2,500,000,000 So that will continue to see some benefit, right?

Speaker 3

Now hedging those floating rate liabilities, we have $1,500,000,000 of swaps and we have those at a rate of 3.56%. So some of the ops, the benefits we received from the floating rate liabilities going down will be offset by the swaps losing some of that benefit. However, as the rates go below 3.56%, we will continue to see benefit. Now also I will remind you that the swaps, most of them mature by the end of the Q2 of 2025. So we'll have to readjust and evaluate our hedging strategy there.

Speaker 3

Outside of that, we have about $525,000,000 of preferred dividends, which are again floating rate. And so those will continue to see benefit right away because of the floating rate changes. Okay. And then separately, we obviously have some longer dated limited mark to market sorry, non mark to market or limited mark to market facilities that will be maturing early in 2025, about $115,000,000 So as those get restructure, we will see some benefit there. And then obviously, as pay downs happen and we reinvest, we should hopefully be able to reinvest the pay downs in higher yielding assets.

Speaker 3

So that's kind of like the summary of how to think about the interest rate sensitivity and how it will affect the AD.

Speaker 6

I appreciate that. Super, very helpful.

Operator

Thank you. Our next questions come from the line of Bose George with KBW. Please proceed with your questions.

Speaker 7

Hi, good morning. This is Frank Ilibetti on for Bose. I just wanted to touch on the fact that your EAD seems to be run remarating around the $0.36 to $0.37 range. Can you just discuss some of the drivers that can get you from here to a double digit net ROE after expenses, please?

Speaker 3

I mean, I just explained some of the EAD growth that we could expect. But as the rates go down, obviously, we will continue to go up. But I would say, I mean, in my prepared remarks, I did say that the return on our economic net interest net interest income return on EAD is about 10.6%. So we are on an economic perspective getting the 10.6%. And as rates continue to go down and our interest expense go down, we will see some additional benefits.

Speaker 3

The one other thing that I will say is there are some investments that still don't go through EAD, like our investment in a LP investment in an RIA. But some of those we will get it. But even though it doesn't go through EAD, it's really from an economic net interest income perspective. We are seeing growth and we will continue to see growth.

Speaker 7

Thank you. And then just to follow-up, given like the current environment, where do you see the best opportunities for investing incremental capital going forward? Thanks.

Speaker 5

Yes. So we did the RPL deal, right? So just like the deal, we expect to make low to double digit returns in there. And in addition, like Phil also talked about in his prepared remarks that we found attractive pockets of relative value on non agency subs and deployed capital there. So those are the things that we are targeting in addition to RTLs.

Speaker 5

That's where we deployed or committed to buy approximately 118,000,000 dollars that's going to get mid to high double digit returns. So those are the areas that we are focusing on in addition to looking at every sector which kind of meets our return bogeys in non QM as well as home equity stuff that we just mentioned.

Speaker 7

Thank you.

Operator

Thank you. Our next question comes from the line of Eric Hagen with BTIG. Please proceed with your questions. Good morning. This is Jake Kudsykes on for Eric.

Operator

Thanks for taking my question. Just wondering if you could walk through the opportunity you have to potentially raise the dividend further or more quickly if you're able to re securitize the callable debt? Thank you.

Speaker 2

Okay. So I'll start with that. So just like as when we raised capital and we're able to invest it accretively, I think that adds to the earnings power of the portfolio. We've held off on the relevering some of the existing deals in part because we could raise capital with a lower hurdle than we could in terms of collapsing those deals. But they've now paid down further and rates have come down.

Speaker 2

So we are looking more aggressively and given where the securitization market is to begin to look for opportunities to re lever and pull cash out. And we think there's opportunities to reinvest that money accretively, which will be a driver to enhance the returns on the portfolio.

Operator

Great. Appreciate that color. Thank you. Thank you. There are no further questions at this time.

Operator

I'd now like to hand the call back over to Phil Carter for any closing comments.

Speaker 2

Thank you, everyone, for participating in our Q3 earnings call. And we look forward to speaking to you next year when we give our Q4 fiscal year 2024 report. Thank you very much.

Operator

Thank you. This does conclude today's teleconference. We appreciate participation. You may disconnect your lines at this time. Enjoy the rest of your day.

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