Chimera Investment Q1 2025 Earnings Call Transcript

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May 8, 2025

There are 9 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Chimera Investment First Quarter twenty twenty five Earnings Call. All lines have been placed on a listen only mode and the floor will be open for 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. Welcome, sir. The floor is yours.

Speaker 1

Thank you, operator, and thank you everyone for participating in Chimera's first quarter twenty twenty five 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 events are based on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the Risk Factors section of 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 Kardis.

Speaker 2

Thanks, Vic, and good morning, and welcome to Chimera Investment Corporation's first quarter twenty twenty five earnings call. It's great to have you with us today. Joining me on the call are Jack McDowell, our Chief Investment Officer Subra Biswanathan, our Chief Financial Officer and Vik Valvo, our Head of Capital Markets and Investor Relations. After my remarks, Subra will review the financial results and then Jack will review the portfolio before opening the call for questions. This has been a strong quarter for Chimera.

Speaker 2

Earnings available for distribution improved by 11%, our book value increased by 7.4% and our economic return was 9.2%. This quarter also marked something new. It was our first full quarter since acquiring Palisades. The integration was fast, seamless, cultural fit, excellent strategic alignment, even better. Whether it's third party advisory, portfolio oversight or core investment strategy, Palisades is now part of the Chimera platform.

Speaker 2

Third party loans under management by Palisades Advisory Services are up 43% year over year, including an increase of $1,500,000,000 during the first quarter to nearly 24,000,000,000 Today, when you combine our on balance sheet assets with the assets we manage for others, we're at nearly $37,000,000,000 That's everything in the residential mortgage market from re performing jumbo prime, residential transition and non QM loans to agency RMBS and residential equity products. It's a deep diversified residential mortgage platform and it's backed by over $2,600,000,000 in equity. Why does this matter? Because we are not just adding businesses, we're building capabilities. We're diversifying our revenue and it's already having a real impact on our bottom line.

Speaker 2

We also made impactful balance sheet moves. This quarter, we exercised our call rights on all our non REMIC securitizations and issued two new securitizations backed by those loans. This was effectively a cash out refinancing that unlocked $187,000,000 at a reinvestment hurdle below 6%. And there's more. In January, we acquired and securitized $288,000,000 in non QM loans.

Speaker 2

We're holding the retained bonds unlevered on our balance sheet and expect a low teen return. In March, we picked up 149,000,000 of agency specified pools. We also settled $100,000,000 in residential transition loans during the quarter. In each case, we expect mid teen levered returns. And lastly, we refinanced two key non mark to market facilities before market volatility hit, increasing their capacity, improving their terms and extending their maturities.

Speaker 2

Importantly, we extracted more than $100,000,000 of additional cash from these refinancings. So what's next? Even in a volatile market, we're holding steady. As of earlier this week, we estimate the current book value to be flat to slightly down from the end of the first quarter. We're continuing to grow our third party loans under management.

Speaker 2

We're adding Agency RMBS assets that deliver returns, liquidity and flexibility. And we're doing it all with a stronger balance sheet and more liquidity than we had at the start of the year. Looking ahead to the rest of 2025, we're staying focused. We expect to diversify the portfolio, grow recurring fee income, add liquidity and look for opportunities to add accretive platforms. Here's the big takeaway.

Speaker 2

We're not just playing defense. We're building Chimera into a hybrid mortgage REIT that's resilient and diversified. Now I'll hand it off to Subra to walk you through the financials.

Speaker 3

Thank you, Phil. I will review Chimera's financial highlights for the first quarter of twenty twenty five. GAAP net income for the first quarter was $145,900,000 or 1.77 per share. GAAP book value at the end of the first quarter was $21.17 per share. For the first quarter, our economic return on GAAP book value was 9.2% based on the quarterly change in book value and the $0.37 first quarter dividend per common share.

Speaker 3

On an earnings available for distribution basis, net income for the first quarter was $33,500,000 or $0.41 per share. Our economic net interest income for the first quarter was $72,300,000 For the first quarter, the yield on average interest earning assets was 5.9%. Our average cost of funds was 4.4% and our net interest spread was 1.5%. Total leverage for the first quarter was 3.9:one, while Rico's leverage ended the quarter at 1.2 to one. For liquidity and securitized financing, the company ended the quarter with $697,000,000 in total cash and unencumbered assets.

Speaker 3

In January, we closed on our SIM twenty twenty five I1 seconduritization. As part of our strategy to mitigate securitization execution risk on certain securitizations, We were short two year treasury future contracts to protect the net interest spread of SIM twenty twenty five i1. This short position was closed out in January. In March, we exercised our call rights and terminated seven outstanding SIM securitizations and refinanced the loans with two new SIM securitizations, enabling the company to extract $187,000,000 in cash. Jack will review in more detail the economics of this activity during his prepared remarks.

Speaker 3

For repo and hedging, we had $2,000,000,000 floating rate sensitivity on our outstanding repo liabilities. And we had $3,200,000,000 in notional value of various interest rate hedges. Of this total, we have $1,500,000,000 hedge positions rolling off during the second quarter, which will result in a more balanced liability hedge position. We had 1,400,000,000 in either non or limited mark to market features on our outstanding repo agreements, representing 47% of our secured recourse funding. During the quarter, we converted a long position in $500,000,000 swaption into a one year pay fixed interest rate swaps with a rate of 3.45%.

Speaker 3

This quarter, we also entered into a $1,200,000,000 SOFR interest rate cap with a 3.95% strike to protect against future interest rate movements as existing interest rate swaps mature. We executed on a total of $155,000,000 pay fixed ED swap futures at a weighted average par rate equivalent pay fixed rate of 3.84%. For the first quarter of twenty twenty five, our economic net interest income return on average equity was 11.2. Our GAAP return on average equity was 25.9% and our EAD return on average equity was 8.1%. And lastly, compensation, general, administrative and servicing expenses were marginally higher quarter over quarter when excluding imputed compensation expenses related to the Palisades acquisition.

Speaker 3

Our transaction expenses were $5,700,000 this quarter, reflecting the costs associated with increased securitization activity. I will now turn the call over to Jack to review our portfolio and securitization activity.

Speaker 4

Thanks, Subra, and good morning, everyone. I'll provide a brief overview of our investment activity during the first quarter as well as provide insight as to how we were positioned heading into April's volatility. During the quarter, markets continued adjusting to the new administration's policy priorities, namely immigration reform, efforts to improve government efficiency and an emphasis on redefining global trade partnerships. Interest rate volatility remained contained through mid February, but spiked on February 19 after the January FOMC minutes reinforced a more hawkish higher for longer stance. Volatility peaked in early March and then eased following the release of a softer than expected February PPI and a well received ten year treasury auction on March 12.

Speaker 4

Over the course of the quarter, treasury yields rallied 36 basis points across twos and tens, maintaining the year end curve steepness of 33 basis points. Credit spreads widened during the period with investment grade and high yield corporate spreads gapping out by fourteen and sixty basis points respectively. Instructured products non QM AAA spreads widened by 25 basis points, while BBBs backed up by 10. In the agency space, current coupon OAS traded within an 18 basis point range versus swaps and 13 basis points versus treasuries ending the quarter roughly unchanged. Housing conditions continue to moderate.

Speaker 4

National home price growth in February was 3.9% year over year with markets in Texas and Florida flat to down, while Northeast cities along with Chicago and Cleveland posting stronger gains in the 6% to 8% range. Resale inventory rose 20% year over year, but remains roughly 46% below pre pandemic levels. Affordability remains challenged with thirty year mortgage rates averaging around 7% throughout the quarter based on bank rate statistics. Existing home sales declined to a 4,000,000 unit annualized pace marking the slowest first quarter print since 02/2009. Single family housing starts were down 14% from the prior quarter as builders remained cautious in the face of rate pressures, price uncertainty and input cost volatility.

Speaker 4

That said, mortgage credit fundamentals remain healthy. Borrower equity is at record levels and both delinquency and foreclosure activity remain near historic lows. Early April brought renewed volatility tied to the announcement of U. S. Tariffs.

Speaker 4

The MOVE index surged more than 50% in just over a week and unusually treasury yields sold off amid the volatility on speculation of foreign selling and purported unwinds of levered basis trades. Credit spreads widened across both corporate and structured product markets. While volatility has since moderated, forecasts have generally shifted to reflect lower growth expectations and increased inflation risk for the balance of the year. Amid this backdrop, our seasoned re performing loan portfolio, which comprises the majority of our GAAP assets, continue to perform in line with expectations. Series delinquencies were stable at 8.9% and prepayments ticked down to 5.5%.

Speaker 4

Our Palisades Advisory Services asset management team remain focused on integrating the portfolio into our systems with an emphasis on driving positive outcomes in the loan book. Our book value increased 7.4% during the quarter, largely driven by compression performing by yield compression in performing loans, which was partially offset by wider yields in the non performing loan cohort. Yields on securitized debt were largely unchanged as spreads widened rapidly in the March neutralizing much of the rate rally during the quarter. We continue to deploy capital in a deliberate and disciplined manner. In light of the macro backdrop, we have built additional liquidity and positioned our portfolio to withstand volatility, spread widening and funding shocks if they were to emerge.

Speaker 4

Importantly, this should also allow us to be opportunistic during periods of market dislocation. During the quarter, we settled a $288,000,000 DSCR securitization and purchased $149,000,000 of specified pools. We also closed $100,000,000 of short duration residential transition loans and committed to another $32,000,000 for settlement in the second quarter. Our team continues to actively evaluate MSR opportunities with potential for us to execute in that sector later in 2025 as a way to generate attractive returns while simultaneously helping to balance the duration risk in other parts of the portfolio. As mentioned by Phil and Subra, some of the quarter's most impactful activity was on the liability side.

Speaker 4

We refinanced two structured repo lines with combined capacity of more than $610,000,000 extending the maturities by eighteen and twenty four months while lowering costs and securing mostly fixed rate non mark to market terms. This unlocked more than $100,000,000 of investable cash at attractive rates. I'm going to pause briefly and ask that you turn your attention to page 16 of our investor presentation. Here we added a supplemental slide that walks through a series of transactions we completed in March. As part of these transactions, we exercised our redemption rights on all $312,000,000 of its outstanding securities tied to our seven non REMIC securitizations.

Speaker 4

These deals collateralized by $646,000,000 of seasoned loans had built significant embedded equity over the years as senior bonds had paid down and loan performance improved. We refinanced those loans into two new securitizations totaling $517,000,000 in senior bonds, one REMIC and one non REMIC transaction further enhancing the cash flow profile of our retained interest and releasing $187,000,000 of cash for reinvestment. As you can see from the middle box on the slide, while our overall cost of funds went down, the additional debt will increase our annual run rate interest expense by approximately $11,000,000 That implies our breakeven return on capital is approximately 5.8%, meaning any incremental return generated in excess of 5.8% should be accretive to earnings. Overall, we view these transactions as foundational. They reflect our ability to generate capital organically, enhance liquidity and continue positioning the portfolio for resilience and optionality.

Speaker 4

These actions left us well positioned entering April. We ended the quarter with $253,000,000 in cash and $444,000,000 of unencumbered assets. This allowed us to comfortably hold cash during the initial period of volatility. Importantly, the resilience of our liability structure limited margin calls to less than $20,000,000 during the volatility despite the market dislocation. By mid to late April, we began selectively adding Agency MBS exposure at attractive entry points.

Speaker 4

However, we remain cautious and expect a relatively high bar for capital deployment given the ongoing uncertainty in current macro environment. As we mentioned last quarter, our focus remains on constructing a durable portfolio that supports attractive risk adjusted returns through cycles. Agency MBS and MSRs remain areas of emphasis complementing our core credit related loan investments. We continue to evaluate non QM and DSCR loans. However, we anticipate any near term investments being opportunistic in nature given our stated portfolio objectives.

Speaker 4

We continue to recycle capital in our short duration residential transition loan book and intend to maintain that allocation as a component of our strategy moving forward. This was a strong quarter. We deployed capital tactically into accretive investments, raised cash organically and significantly improved the flexibility of our funding stack, all of which helped us navigate April's volatility and positions us well going forward. As always, we remain focused on disciplined risk management and thoughtful portfolio construction. That concludes our remarks.

Speaker 4

We'll now open the line for questions.

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. And we'll take our first question from Doug Harter from UBS. Please go ahead, Doug.

Speaker 5

Thanks. Just first for clarification. When you said book value was flat to slightly down so far in the second quarter, just can you just put some numbers around what slightly down might mean?

Speaker 4

I think as of Tuesday Doug is down about 40 basis points.

Speaker 5

Great. That's super helpful. And then I guess how should we think about the timing to deploy that extra $187,000,000 of investment capital that you freed up with the re securitization? And then with kind of with that and the earnings power you delivered this quarter, how are you thinking about the dividend?

Speaker 4

Yes. So I can talk quickly about the deployment of the capital. So I would say up to this point, we probably deployed about a third to 40% of it. Like we said in the prepared remarks, I mean the bar for capital deployment in this environment certainly on the credit side is somewhat high. Our focus is right now building up that liquidity bucket.

Speaker 4

We think that's an important component of our both near term and long term strategy. So we have been deploying that into agency MBS. We see the relative value there being attractive. We also see based on how we're hedging out the duration risk that helping with our book value volatility. So in the near term that is our focus.

Speaker 4

If we were trying to predict how long it would take to deploy, like I said, we're probably a third to 40% of it allocated up to this point and we would tactically look to deploy the remainder subject to cash reserves and that kind of stuff over the next four to eight weeks.

Speaker 2

And Doug, this is Philip. About the dividend, that's something that we'll probably start thinking about in the next month or so. And as you know, there's a variety of factors that go into that in terms of what we look at for a Board determination. But I think it's just premature at this point for us to think about that given the market volatility. We'll see how things play out over the next month or so.

Speaker 5

Great. Thank you, guys.

Operator

Thank you. And we'll take our next question from Trevor Cranston from Citizens. Please go ahead, Trevor.

Speaker 6

Hey, thanks. Good morning. Looking at the third party business, the growth seems like it's been pretty consistent over the last several quarters. Could you talk about the outlook for that business in terms of the growth potential over the next year or two? Thanks.

Speaker 6

Yes. Look,

Speaker 2

I mean, we're we believe that there's a fair amount of growth potential there. It's so we're bullish on this. But it depends on a variety of factors as third parties continue to purchase loans. I mean, we provide a valuable service to them in terms of what I would call the blocking and tackling aspect of it. And so we think there's still upside as we continue to bring in new clients.

Speaker 2

But that is something that's just going to depend on kind of where we see the mortgage market go. But it's both growing within existing clients and we're adding some new clients.

Speaker 6

Got it. Okay. That's helpful. And then on the flat book value performance in the start of the second quarter, have you guys basically seen credit spreads fully recover from the widening in the April? Or can you just take us through kind of the moving parts of the flat book value?

Speaker 6

Thanks.

Speaker 4

Yes. So we've seen yes, it's a good question. I mean, a credit spread perspective, we have seen just April through today generally some widening in spreads. We've seen it retrace from the wides, but about halfway I would say. Does that make sense?

Speaker 6

Yes. So is the remainder of how you get to a flat book value is that coming from like the interest rate component of things?

Speaker 4

Yes. No. So you have to remember, when we our book value is impacted by both our assets and liabilities. So the change in book value is going to also be affected by how rates move across the curve. So our some of our securitized debt is shorter duration and our loans are longer duration.

Speaker 4

The way that we get back to a flat book value quarter to in the second quarter, quarter to date, basically the deterioration in loan value from wider credit spreads has also been offset by the change in the securitized debt as well. So they're basically offsetting each other.

Speaker 6

Got you. Okay. That makes sense. Thank you.

Speaker 4

And just one thing I would point out too, we've tried to add additional disclosure in the investor presentation. So we put a couple of new slides in there that provide additional detail with respect to our loan and securitized debt portfolio. So hopefully having that information will help the market get a sense of how the book value is moving in the different components, but it is a nuanced portfolio.

Speaker 6

Yes. Got it. Okay. Thank you.

Operator

Thank you. And we'll take our next question from Bose George from KBW. Please go ahead, Bose.

Speaker 7

Hey, guys. Good morning. In terms of the book value going forward, after the hedges roll off in the second quarter, what is your portfolio duration going to look like?

Speaker 4

Yes Bose, keep in mind, notwithstanding what we're doing on the agency side and in the first quarter that was relatively minute. But we hedge the floating rate interest rate risk on our short duration repo. So even the hedges that we have on with our swaps and our cap and everything we have on now that really isn't there to protect book value. The way that we sort of look at things is when we buy loans, we securitize them that is in effect locking in our net interest margin and providing the hedge for our assets. Now that we consolidate the loans and securitizations on our balance sheet that does create some book value volatility.

Speaker 4

But when the the way that we're looking at our hedge strategy is when those hedges roll off that will increase our exposure to our floating rate liabilities. It really won't have much impact at all on the volatility in our book value. The way that we're looking just like just to expand on that a little because the book value element is something that we are focused on from a portfolio construction standpoint. We're not necessarily looking to hedge our book value risk and incur those costs given the way that we finance our portfolio. But we do believe that through adding an agency component, adding MSRs that is a natural way where we can add yield generating assets that will balance the duration volatility in our credit book.

Speaker 7

Okay, great. Thanks. And then just in terms of the deployable capital, there was 187,000,000 Was there another number you mentioned earlier in the call? I thought it was $100,000,000 but yes, just wanted to clarify if it was just at 187,000,000 or was there another number as well?

Speaker 4

Yes. So there were multiple activities or series of transactions that occurred in the first quarter. In addition to the re securitization of our non REMIC transactions that's the $187,000,000 We also refinanced two structured repo facilities and we lowered our cost of funds in those facilities. We extended the term to eighteen and twenty four months and collectively we were able to extract an additional 100 approximately $100,000,000 in investable cash.

Speaker 7

Okay. And so should we see that $100,000,000 as kind of fully deployable, it's really $287,000,000 that you can kind of invest?

Speaker 4

That's right.

Speaker 7

Okay. Okay, Thanks.

Operator

Thank you. And we'll take our next question from Eric Hagen from BTIG. Please go ahead, Eric.

Speaker 8

Hey, thanks. Good morning, guys. What's the right way to maybe think about the sensitivity to higher delinquency rates from here between the RPL portfolio and things like the non QM and some of the newer issue loans and other opportunities you talked about? I mean, the one hand, like the RPL portfolio is conditioned on being delinquent, right? And the DQ rate is already relatively high and the non QM is starting from a lower point.

Speaker 8

So like what are your expectations for how each of those asset classes could respond to higher delinquency rates from here?

Speaker 4

Yes. No, that's a great question. And we I mean, obviously being a credit oriented shop, we think about that all the time. And I actually wouldn't characterize the delinquencies in the RPL portfolio as being high for that type of product. I think if you look across the RPL universe, right around that 10% level is pretty average.

Speaker 4

And I would say just looking at the trends in our portfolio that level has been very stable over time. Keep in mind, these are very unique borrower cohorts. They've got a lot of equity. They've been in the house for over seventeen years. Oftentimes you have life events that cause delinquencies for a month or two at a time.

Speaker 4

It does require some degree of engagement by the servicers and that's sort of where our Palisades asset management capability comes into play, just making sure that when there is some sort of a hardship, oftentimes temporary that they're making right party contact with these borrowers, understanding what their situational profile is and then working collaboratively to try to remedy that. And then on the non QM side, the nice thing about those portfolios these days, just given the amount of equity, the credit quality in those portfolios, we have seen just in general non QM delinquencies starting to trend upwards. So it's definitely something that we are monitoring not just in our portfolio, but just across the market in general as we think about deployment of capital. And just from a sensitivity standpoint, credit risk is the risk that we take. And that's why we have an asset management team.

Speaker 4

That's why we have systems and infrastructure in place to ensure that we are managing that risk appropriately. But right now, just given the equity in the market, given the credit fundamentals that we're seeing across mortgage finance, We don't have a high degree of concern that we're going to have significant risk in our portfolio with respect to an increase in defaults and delinquencies.

Speaker 8

That's really good color. I appreciate that. You mentioned the two new loan facilities. I think I heard you say are what's the advance rate on those facilities? And are those specifically for the subordinate securities that you guys retain?

Speaker 8

And the counterparty on those facilities, are those banks or non banks?

Speaker 4

Yes. So they're structured repo facilities. We're really not going to give out the advance rate on these. The assets are a lot of our derivatives are retained positions. So really the advance rate is sort of doesn't make a whole lot of sense unless you understand the underlying collateral.

Speaker 4

And those were done through banking relationships.

Speaker 8

Got it. And are there margin call holidays or such on those structured repo facilities?

Speaker 4

Yes. No, that's a great question. So we extended the terms and those are non mark to market or limited mark to market facilities, which that actually in the prepared remarks is a big push that we have. And even during the April volatility, our margin calls were limited to less than $20,000,000 during that entire timeframe, which is really a testament to the efforts that have gone into structuring our different financing lines.

Speaker 8

Great. Good stuff. Thank you guys so much.

Operator

And there appear to be no further questions at this time. I'll turn the floor to Phil Cardis for closing remarks.

Speaker 2

Hi, this is Phil Cardis. And I want to thank everyone for participating in our first quarter twenty twenty five earnings call. And we look forward to speaking to you in a couple of months for our second quarter earnings call. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.

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Key Takeaways

  • Q1 results showed double‐digit improvement with earnings available for distribution up 11%, book value per share rising 7.4%, and a 9.2% economic return.
  • The seamless integration of Palisades boosted third-party loans under management by 43% year-over-year, bringing total AUM to nearly $37 billion.
  • Executed strategic balance sheet moves—including exercising call rights on non-REMIC securitizations to unlock $187 million and refinancing two repo facilities to extract over $100 million—at sub-6% reinvestment hurdles.
  • Maintained strong liquidity with $697 million in cash and unencumbered assets, while deploying capital selectively into agency MBS, non-QM and DSCR loans targeting mid- to high-teen returns.
  • Looking ahead, Chimera is building a resilient, hybrid mortgage REIT by diversifying the portfolio, growing recurring fee income, adding liquidity, and pursuing accretive platforms.
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Earnings Conference Call
Chimera Investment Q1 2025
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