Chimera Investment Q2 2024 Earnings Call Transcript

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August 7, 2024

Key Takeaways

  • Chimera executed its first unsecured debt offering by issuing $65 million of 9% senior notes, received an inaugural BBB rating and immediately deployed proceeds into agency CMO floaters to diversify funding and enhance liquidity.
  • The company raised its quarterly dividend from $0.33 to $0.35 (a 6% increase), marking the first dividend hike since March 2021.
  • In Q2 Chimera purchased approximately $377 million of agency CMO floaters, $65 million of guaranteed senior SLST securities and $16 million of non-agency subordinated bonds, targeting low-double-digit returns on these investments.
  • Chimera sponsored its first RPL securitization since May 2023 (SIM 2024 R1), selling $352 million of senior notes, retaining $116 million of subordinate notes and interest-only securities at an average cost of debt of 5.7%.
  • Q2 GAAP net income was $33.9 million ($0.41/share) with GAAP book value ending at $21.27/share; the portfolio’s current LTV is ~46% and delinquencies are at their lowest level since 2019, while total leverage remains prudent at 3.8x.
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Earnings Conference Call
Chimera Investment Q2 2024
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Chimera Investment Corporation Second Quarter Earnings Call. Our host for today's call is Victor Falvo. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would like to now turn the call over to your host.

Operator

Mr. Falvo, you may begin.

Speaker 1

Thank you, operator, and thank you, everyone, for participating in Chimera's 2nd quarter 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 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 President and Chief Executive Officer, Phil Cardis.

Speaker 2

Good morning, and welcome to Chimera Investment Corporation's Q2 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, Subra will review the financial results, and then we'll open the call for questions. Throughout the quarter, we experienced some headwinds, but by the end of July, we have accomplished what I would call a period of firsts. This quarter, we successfully completed our 1st unsecured debt offering and received an inaugural investment grade rating on the debt.

Speaker 2

We made

Speaker 3

our first

Speaker 2

large agency investment since before the pandemic. We have a long history of agency investments and this provides us with meaningful income and liquidity. We committed to purchase a pool of RPLs and at the end of July sponsored our 1st RPL securitization since May 2023. And most importantly for our shareholders, we raised the dividend for the first time since March 2021. Last quarter, we noted that 4 main themes that emerged as we began the 2nd quarter.

Speaker 2

Inflation was still higher than the Federal Reserve's desired rate. Economic data continued to indicate a strong economy. Long term interest rates may not have peaked and interest rates would experience increased volatility. Looking back over the quarter, market volatility was substantial with 10 year treasury yields starting the quarter at 4.2%, rising to 4.7% by late April and dropping back to 4.4% by the end of June. The Q2 GDP significantly beat expectations, indicating that the economy remained strong.

Speaker 2

But there were signs that the economy was beginning to weaken. The labor market continued to cool and inflation is now trending in the right direction the near term, long term rates appear to have peaked and the the near term, long term rates appear to have peaked and the economy may be heading towards more normalized inflation and perhaps a weaker economic environment. Last week, the Fed held interest rates constant as expected and at its press conference, Chairperson Powell suggested that a September cut could be on the table if inflation continues to slow down. However, he also emphasized that the Fed would make decisions meeting by meeting based on the totality of the data and balance of risks. After his comments, the non farm payroll number released last week came in much weaker than expected as unemployment rate ticked up to 4.3%, an almost 3 year high.

Speaker 2

While it's only a single month of data, the yield on the 10 year treasury is up to around 3.9%. And it is looking increasingly likely that the Fed is going to cut interest rates in September. The housing market remains resilient. National home prices have continued to rise, though at a more moderate pace. The home equity buildup, which has occurred across America in the last several years, has been beneficial for our loan portfolio.

Speaker 2

We consolidate on our balance sheet over 109,000 loans with an average balance of $108,000 The weighted average loan of our portfolio is over 15 years and we estimate that the overall current LTV of our loan portfolio through amortization in HPA to be approximately 46%. Despite higher interest rates over the quarter and intra quarter yield volatility, our book value was relatively flat for the period. And this quarter we raised our dividend from $0.33 to $0.35 a 6% increase. In May, we issued $65,000,000 of 9 percent unsecured senior notes. These notes will mature in 5 years and are callable in whole or in part at the company's option on or after May 15, 2026.

Speaker 2

After the offering, the company received a BBB investment grade rating from Egan Jones, a nationally recognized statistical rating organization. Our ability to issue unsecured debt helps us to further diversify our capital structure and provide long term financing for our mortgage credit portfolio. The proceeds from the debt raise were immediately deployed into the purchase of approximately $377,000,000 of agency CMO floaters. This investment is meant to generate income and provide liquidity until we eventually deploy the proceeds in loans or non agency subordinate securities. We kept our recourse leverage low on the agency floaters and we expect to generate low double digit returns.

Speaker 2

In agencies, we also purchased $65,000,000 of a guaranteed senior SLST securities and we expect to generate low to mid teen returns on this investment. Throughout the quarter, we made new credit investments as well. We purchased $16,000,000 non agency subordinate bonds with an average coupon of 10.7% at a discount to their par value, and we expect to generate low double digit returns on an unlevered basis. Combined with the purchases made in the Q1, we purchased a total of 60 $7,000,000 of high yield subordinate bonds on an unlevered basis. And lastly, this quarter, we committed to purchase reperforming loans that settled simultaneously in July and to SIM 2024 R1, a rated securitization.

Speaker 2

Securities issued by the securitization with an had an aggregate principal balance of approximately $352,000,000 were sold in a private placement institutional investors. These senior securities represented approximately 75% of the capital structure. We retained subordinate notes and certain interest only securities with an aggregate principal balance of approximately $116,000,000 The deal was structured with a 30% cleanup call. Our average cost of the debt for this securitization is 5.7%. The loans for the securitization had a weighted average coupon of 5.6% a weighted average loan size of $228,000 and we're 86 months seasoned on average.

Speaker 2

Following on SIM 2024 R1, we expect to continue to acquire and securitize mortgage loans as well as further implement the company's call optimization strategy on our securitizations. The timing of these re securitizations is impacted by many factors, including credit performance, prepayment speeds, interest rates and market volatility. As we navigate the current market conditions, we're focused on maintaining low recourse leverage and managing our liquidity with a proper balance of both cash and unencumbered securities. Our credit portfolio continued to perform well in the quarter, with the credit performance of our portfolio continuing to be within or better than our original investment expectations on mortgage delinquencies, default rates and recoveries. In summary, we've been able to access the capital markets and acquire accretive assets.

Speaker 2

We've started buying and securitizing loans and we'll continue to look for opportunities acquire and securitize additional loans. We were able to restart agency RMBS for income generation as well as for providing liquidity. And finally, we were able to raise our dividend. We are pleased with our performance for the first half of the year and we remain optimistic about our future. I would now like to turn to Subra to give a more detailed overview of our financial results.

Speaker 4

Thank you, Phil. I will review Chimera's financial highlights for the Q2 2024. GAAP net income for the Q2 was 33,900,000 dollars or $0.41 per share. GAAP book value at the end of 2nd quarter was $21.27 per share. For the Q2, our economic return on GAAP book value was 1.4% based on the quarterly change in book value and the 2nd quarter dividend per common share.

Speaker 4

And year to date 2024, our economic return on book value was 8.4%. On an earnings available for distribution basis, net income for 2nd quarter was $30,300,000 or $0.37 per share. Our economic net interest income for the 2nd quarter was $73,000,000 For the 2nd quarter, the yield on average interest earning assets was 5 0.9%, our average cost of funds was 4.2% and our net interest spread was 1.7%. Total leverage for the Q2 was 3.8:one, while recourse leverage ended the quarter 1:one. For financing and liquidity, the company ended the quarter with $649,000,000 in total cash and unencumbered assets.

Speaker 4

For hedging, as mentioned on the last earnings call, we had $1,000,000,000 pay fixed rate swaps, pay fixed interest rate swaps mature in May. This quarter, the company exercised 1 swaption contract for $500,000,000 notional and entered into a 1 year swap for $500,000,000 notional at a 3.76% pay fixed rate. We had $2,000,000,000 floating rate exposure on our outstanding repo liabilities. We had $1,500,000,000 pay fixed interest rate swaps at a weighted average fixed pay rate of 3.56 percent as a hedge position for our floating rate liabilities. We had $1,400,000,000 of either non or limited mark to market features on our outstanding repo agreements, representing 52% of our secured recourse funding.

Speaker 4

And during the quarter, the company hedged the interest rate execution risk on our 2024 R1 securitization with a short position of approximately 308,000,000 treasury future contracts. The hedge was closed prior to settlement of the RM securitization. For the Q2 of 2024, our economic net interest income return on equity was 11.1%. Our GAAP return on average equity was 8.6% and our EAD return on average equity was 7.1%. This quarter, the company implemented a 1.43 reverse stock split with the objective of reducing Chimera's number of shares of common stock outstanding for companies of a similar market capitalization.

Speaker 4

We believe the reverse stock split will make the common stock more attractive to a broad range of investors, which has the potential to reduce share price volatility over time. And lastly, for the Q2 2024, expenses excluding servicing fees and transaction expenses were $13,300,000 down $1,600,000 from 1st quarter, a reduction of 11%. That concludes our remarks. We will now open the call for questions.

Operator

Your first question comes from Doug Harter with UBS. Your line is open.

Speaker 5

Thanks. Good morning. Hoping you could give us an update on how book value is trending so far in the Q3 given the significant moves in rates?

Speaker 2

Hi. This is Phil, Doug. I'm going to turn this over to Dan. Yes. Hi, Doug.

Speaker 6

So good morning. So as you know, like markets have been pretty chaotic the past few days, although they did recover to an extent yesterday. Based on a deal pricing Monday, price stock on a couple of deals being marketed right now and some trading that we've seen in the subs, we see spreads approximately 20 to 30 basis points wider. So I would say our book value is up around roughly 2%, primarily because of the rates that have rallied close to 50 basis points to 60 basis points in the intermediate part of the curve since the quarter end. But I would still caveat it that markets are still trying to find its footing as we speak.

Speaker 6

If she would have asked this question And then, Phil,

Speaker 5

you And then, Phil, you guys issued the unsecured note during the quarter. Can you talk about how big a part of the capital stack that can be and your appetite for continuing to access additional forms of capital for growth?

Speaker 2

So as we think about things, I mean, we do believe that growing our asset base will lead to us growing the dividend, which is going to be in the best interest of shareholders over the long term. And so we think that at that rate, we could and did acquire accretive assets. And as we think about it, we're looking at it relative to our overall size, how this debt will begin to roll in 2 years. So we're going to be, I think, in the beginning relatively modest keeping all those factors in play. But we do think it is an interesting and important piece to add to our overall capital structure, but we're going to be cognizant about its size relative to overall because we had to be thinking about 2 years from now, 3 years from now, our ability to either call that debt or refinance it.

Speaker 2

So keeping it appropriately sized given our size is what we're looking for.

Speaker 5

Great. Thank you.

Operator

Your next question comes from Bose George with KBW. Your line is open.

Speaker 3

Hey, guys. Good morning. Actually, I wanted to ask what's the best way to think about your rate hedge or rate exposure, EAD exposure as the Fed's cutting rates? You've got, I guess, the piece of your repo that's not hedge with swaps, you've got your preferred, said we'll reprice down. It's kind of sort of looking at the whole the big picture of that, I mean, do you feel like that gets you to a double digit EAD as the Fed, if the forward curve is right or just yes color on that would be great?

Speaker 2

I'm going to turn this over to Subra.

Speaker 4

Hey, Bose. Thanks. Look, we think rate cuts will impact both EAD both positively and also significantly, right? To answer your question specifically, we have about $2,000,000,000 of floating rate liabilities and hedging those, we have about $1,500,000,000 of swaps. The rate on these swaps is pay fixed at 3.56%.

Speaker 4

So to the extent that the rates fall below this 3.56%, we will begin to pick up additional sort of income as long as we don't put additional hedges from there on, right. So that's in context of what the liabilities and the swaps with the hedges. In terms of preferred, we have $525,000,000 of preferreds that are currently floating. So any rate reduction will continue to benefit that. There is also a small piece, another 175,000,000 dollars piece I believe, which is in prefers, which will go floating in the last quarter of 2025.

Speaker 4

So that could increase a little bit. I'm sorry, it's $200,000,000 sorry, it's $200,000,000 please.

Speaker 3

Okay, great. Okay. And then Sorry, go ahead. Sorry, I didn't mean to interrupt. Go ahead, Samir.

Speaker 2

No, I think if we've answered, is there I think was there we thought maybe you would we've gotten what you're looking for.

Speaker 3

Yes, I did. So I can get that. Thanks. Switching over then to book value sensitivity. I mean, you answered Doug's question on the book value.

Speaker 3

But prospectively, just thinking about, again, if the forward curve is right, rates are down, but spreads kind of tightened over time as things stabilize. Is there a good way to think about your potential benefits to your book value as that happens?

Speaker 6

I mean depending on the magnitude of the rate and the spread moves, which eventually we think it's going to happen after market sort of settles down. The only thing I can say is it should be a positive impact to our book value.

Speaker 3

Okay, great.

Operator

Thanks. Your next question comes from Stephen Laws with Raymond James. Your line is open.

Speaker 7

Hi, good morning. Can you touch on the callable security securitizations, how you see that playing out? And has the rollover in rates changed your expectation of repayment speeds and kind of how quickly or the amount of deals you'll call and look to re securitize to free up additional capital?

Speaker 2

Yes, this is Phil. So as we've mentioned on prior calls about maybe the first ones we would look to do is our NR deals because we think there are loans that are performing in there and there's an opportunity to lower the overall cost of the financing on those. We've looked at feedback that we've looked at a lot of those 2 normal factors, but also this past period given where the hurdle rate was 9% the debt was a more effective way for us to raise capital. And now we're looking at potential Fed rate cuts. So we're looking at the timing of that will only improve with those rate cuts.

Speaker 2

So I think that's how we're looking at it. We were very close to thinking about the in our deals. And I think those economics are going to improve once the Fed starts cutting. And so given that we were able to access the market at a 9%, that was what we did first and we're going to be still monitoring the re securitizations. And as far as other non NRs, obviously, as rates continue to drop, those start to come into play as well.

Speaker 2

So hopefully that's helpful for you.

Speaker 7

It is. And to kind of drill down a little bit, I mean, is it possible to quantify any of that as far as how much capital you think you could free up or maybe once you execute the recent calls and re securitizations kind of what the incremental return would be on that capital as you kind of optimize deployment?

Speaker 2

Yes. That is something that we were looking at. But even as Dan talked about thinking about book value, it's depending on so many factors. It's really at that moment. I do think in the past, we've done these relevers where we think it's going to be a material improvement to the company.

Speaker 2

And so I can kind of quantify it that way. But at this point, thinking about when we might do it in the future and what it means, it's really hard for me to be much more specific other than things are moving in the right direction. And when we do, do it, we'll do it when it's going to be a material benefit to the company.

Speaker 7

Sure, sure. A lot of moving assumptions in that question. Lastly, I thought it was notable that loan portfolio delinquencies are at the lowest level since 2019. Can you talk about what's driving that strong performance? Is it aggressive resolutions on problem loans?

Speaker 7

I mean, it seems typically as long as pool season, you see increased delinquencies, but I thought that was that strength in loan delinquencies was notable. So I was hoping you'd comment on that.

Speaker 2

Yes. If you think about it, it really is kind of reverting back to kind of pre pandemic. So it's a little bit of a reversion to the mean kind of post pandemic. And it's been a trend down since it kind of spiked up in 2020. So I think maybe the better way to look at it is we're kind of now worked our way through the pandemic and we're kind of reverting back to kind of a pre pandemic level given the seasoning of our portfolio.

Speaker 7

Great. I appreciate the comments this morning.

Speaker 3

Thank you.

Operator

Your next question comes from Eric Hagen with BTIG. Your line is open.

Speaker 8

Hey, good morning. This is Jake Kedziekis on for Eric. Thanks for taking my questions. I wanted to talk about prepayment activity. Are you guys expecting to see a pickup in it as a result of the recent interest rate moves?

Speaker 8

And can you maybe pinpoint at what level of rates you think prepayment activity would begin to accelerate more meaningfully? Thank you.

Speaker 3

Go

Speaker 6

ahead. So I think obviously it's too early to call that, but if you look at our RPL portfolio, that has ranged from close to 6 CPR to low to mid double digits. If we come to the point where rates meaningfully mortgage rates meaningfully go down from here, we could expect to see our RPL prepayments go back to, would say, low to mid double digits.

Speaker 8

Great. Thank you so much.

Operator

At this time, there are no further questions in queue. I'd like to turn the call back over to Mr. Phil Cardes for any closing remarks.

Speaker 2

Thanks for participating in our earnings call, and we look forward to speaking to you with our Q3 results.

Operator

This concludes the Chimera Investment Corporation's 2nd quarter earnings call. Thank you for attending and have a wonderful rest of your day.

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