Chimera Investment Corp
NYSE:CIM
Earnings Call Analysis
Q4-2023 Analysis
Chimera Investment Corp
Over the course of the year, the company weathered fluctuations in the 10-year Treasury yield and a volatile market which saw the Federal Reserve raising interest rates by 100 basis points and 30-year mortgage rates hitting an 8% peak. Despite multiple external challenges, including a near crisis in the banking sector and ongoing geopolitical tensions, the company's portfolio remained stable with interest income for 2023 mirroring that of 2022 at $773 million, and credit metrics aligning with or exceeding initial expectations. Additionally, the company strategically reduced its total recourse financing by approximately $1 billion and saw savings from refinancing $250 million of high-cost debt.
The company proactively managed its capital, calling 6 deals and issuing 4 new deals worth $1.2 billion, which led to recapturing $133 million. It raised about $74 million through ATM issuance and deployed capital into high-coupon non-agency securities, acquiring them at a discount to yield low to mid-teen unlevered returns. Furthermore, the company committed to purchasing approximately $150 million of business purpose loans, expecting mid-teen levered returns, reflecting a keen eye for lucrative investment opportunities.
The company's GAAP net income for Q4 stood at $12 million or $0.05 per share, culminating in $52 million or $0.23 per share for the entire year. Despite a slight drop in book value in Q4 due to asset sales and liability marking, the economic return on GAAP book value leveled at a slight negative, balanced by $0.70 dividends declared for the year. The firm also boasts $599 million in total cash and unencumbered assets, showcasing a solid liquidity position.
The company hedges its floating rate exposure with $1 billion in pay-fixed interest rate swaps and $1.5 billion in swaptions. This approach, coupled with economic net interest income return on equity of 10.5% and a 23% year-over-year reduction in expenses (excluding certain fees), underscores a responsible fiscal strategy, focused not only on growth but also on cost efficiency and risk mitigation.
Anticipating higher interest rates to persist, the firm plans to scale-in and acquire high-yielding assets in anticipation of future Fed rate cuts, expected towards the end of 2024 or later. It aims to take advantage of callable securitizations and forward contracts on attractive terms. The company's proactive and forward-looking stance is exemplified by its preparations to capitalize on market movements and its current assets substantially covering the dividend, signaling a robust foundation for future performance.
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Hello, and welcome to the Chimera Investment Corporation's Fourth Quarter and Full Year 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to Victor Falvo, Head of Capital Markets and Investor Relations. Please go ahead, Victor.
Thank you, operator, and thank you, everyone, for participating in Chimera's Fourth Quarter and Full Year 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. 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 earnings supplement for reconciliation to the most comparable GAAP measures.
Additionally, the content of this conference call may contain time-sensitive information and 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.
I will now turn the conference over to our Chief Executive Officer, Phil Kardis.
Good morning, and welcome to Chimera Investment Corporation's Fourth Quarter and Full Year 2023 Earnings Call. Joining me on the call are Choudhary Yarlagadda, our President, Chief Operating Officer and Co-Chief Investment Officer; Dan Thakkar, our Co-Chief Investment Officer; Subra Viswanathan, our Chief Financial 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.
Let me begin by recognizing Choudhary Yarlagadda, who announced his retirement. C.Y., as he's affectionally known, has been here since the beginning. He has been involved in all aspects of our business, from structuring our securitizations and unique financings to managing our operations and information technology groups. These are some big shoes to fill, and I'm confident with C.Y.'s assistance, our transition will be seamless. While we're saddened by his departure, we are happy for him as he begins the next stage of his journey. And we wish C.Y. nothing but the best.
As I think back about last year, I'm reminded of Maxine Nightingale's song, get right back to where we started from. When we ended 2022, 10-year Treasury had a yield of 3.87%. And again, as we ended 2023, the 10-year had a yield of 3.88%. But as we got right back to where we started from, we took a very volatile, circuitous route.
During the year, we saw the 10-year Treasury yield drop to 3.3% in early April and reach as high as nearly 5% in October before finishing the year at 3.88%. Silicon Valley Bank and several other large regional banks failed and nearly sparked a full-fledged banking crisis. The Federal Reserve raised interest rates 4 times for a total of 100 basis points, and the rate for 30-year mortgages reached a peak of 8%, a level not seen since the year 2000. Geopolitically, we saw the war in Ukraine continue on its Sisyphean path, and a new conflict developed in the Middle East.
Despite these adverse market conditions, we achieved some significant accomplishments throughout the year. We believe our portfolio performed well during the volatile environment as evidenced by interest income for 2023 essentially unchanged from 2022 at $773 million, and our credit metrics continue to be in line or better than originally expected at acquisition. We reduced our total recourse financing by approximately $1 billion, and we refinanced $250 million of high-cost debt with a new facility providing considerable savings.
We continued our business strategy of acquiring and securitizing mortgage loans. In total, for 2023, we purchased $1.4 billion of mortgage loans. 50% of the loans were seasoned reperforming loans, 33% were DSCR investor loans, and the remainder were business purpose loans. We securitized $841 million of the reperforming loans and $475 million of the DSCR loans.
We called 6 existing deals and issued 4 new deals totaling $1.2 billion, enabling us to recapture $133 million.
And we raised approximately $74 million from ATM issuance and have begun deploying the capital into high-coupon non-Agency securities, which we purchased at a discount, generating low to mid-teen unlevered returns and committed to purchase approximately $150 million of business purpose loans with mid-teen levered returns.
So what do we see in 2024? We continue to follow the Fed mantra of higher for longer, especially as evidenced by recent statements by Chairman Powell, the recent blowout of January employment numbers and yesterday's core CPI of 3.9%, all of which support our view of higher for longer.
We are hopeful for rate cuts by this summer, but we're planning for cuts later in the year, likely after the election, with more cuts to come in 2025. We feel now is the opportunity to begin to scale in and acquire high-yielding assets in front of the expected Fed cuts. As I mentioned, we have already begun adding assets.
In addition, we've entered into forward contracts, had to acquire loans, and we expect to expand our forward purchases and flow arrangements in 2024. Additionally, with expected rate cuts by the end of the year, we may acquire loans now and hold them on warehouse facilities until securitization economics are more stable and provide better long-term returns for our portfolio.
Finally, as of December 2023, we had 14 outstanding securitizations that are callable, and 4 more become callable in 2024. The timing of exercising our option to call these securitizations depends on a variety of factors as we have discussed in the past. I note that our non-REMIC deals present some nuances that are slightly different from most of our securitization. For instance, generally as a percentage of REMIC-eligible loans increases in those securitizations, economics of exercising the call improves.
With rate cuts in the not-too-distant future, I'm optimistic about our future. We have a talented team and outstanding assets and a clear business.
I would now like to turn to Subra to give a more detailed overview of our financial results.
Thank you, Phil. I will review Chimera's financial highlights for the fourth quarter and full year 2023.
GAAP net income for the fourth quarter was $12 million or $0.05 per share. And GAAP net income for the full year was $52 million or $0.23 per share. GAAP book value at the end of the fourth quarter was $6.75 per share.
The reduction in value this quarter was mostly driven by a small realized loss on asset sales during the quarter, higher marks on 2 separate liability facilities and dilution from ATM issuance. For the fourth quarter, our economic return on GAAP book value was negative 58 basis points based on the quarterly change in book value and the fourth quarter dividend or common share. And for the full year, our economic return was negative 53 basis points, which included $0.70 of dividends declared in 2023. On an earnings available for distribution basis, net income for the fourth quarter was $31 million or $0.13 per share, and net income for the full year was $119 million or $0.51 per share.
Our economic net interest income for the fourth quarter was $68 million and $271 million for the full year. For the fourth 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 fourth quarter was 4:1 while recourse leverage ended the quarter at 1:1.
For financing and liquidity, this quarter, we refinanced $250 million high-cost debt into a new facility, which will reduce the interest expense by more than 600 basis points.
The company had $599 million of total cash and unencumbered assets at year-end. We had $1.7 billion floating rate exposure on our outstanding repo liabilities. We had $1 billion pay-fixed interest rate swap at a rate of 3.26% as a hedge position for our floating rate liabilities. These swaps mature in the second quarter of 2024. And we had $1.5 billion swaptions to pay-fixed for 1 year beginning in the second quarter of 2024 at a weighted average strike rate of 3.56% as a hedge position for liabilities. We have $1.5 billion of either non- or limited mark-to-market features on our outstanding repo agreements, representing 60% of our total recourse funding.
For the full year, our economic net interest income return on equity was 10.5%. Our GAAP return on average equity was 4.9%, and our EAD return on average equity was 7.2%. And lastly, for the full year 2023 expenses, excluding servicing fees and transaction expenses, were $55.7 million, down $16.3 million from full year 2022, a year-over-year reduction of 23%.
That concludes our remarks. We will now open the call for questions.
[Operator Instructions] Our first question today is coming from Bose George from KBW.
First question just was on the comment you made on the book value change and the mark on the liability side. Was there any -- no corresponding mark on the asset side for some of those holdings?
This is Subra. Thanks for the question. No, the portfolio overall experienced a mark-to-market benefit during the quarter. What I highlighted was there were actually the reasons where some of the items that actually cost the book value to go down. But overall, the portfolio -- the residential credit portfolio experienced a significant mark-to-market gain.
Okay. So the drivers really then were just the ATM issuance and that one, the realized loss that you mentioned?
Well, there's a realized loss. And there's like 2 liability facilities. One is a prime jumbo facility, which had a bunch of embedded swaps in it, which had a -- quite honestly, a higher mark, but because it was a higher mark on our liability, it was a lower book value for us.
And also, the other reason was we had 2 -- previously, we had 2 unsold securities from our prior securitizations, which were financed in our repo facilities. We then sold them out this past quarter. So now they became sec debt. So the sec debt, from the time it became sec debt and where we sold it to the end of the period mark, it experienced a further increase in value, which reduced our book value.
Okay. Okay. That's helpful. And then actually in terms of the ATM issuance, what was the average price for that?
Give me 1 sec. Let me just confirm.
It's a low 5, confirm the exact. Low 5.
Our next question today is coming from Trevor Cranston from JMP Securities.
Actually, just a follow-up on the question about the ATM issuance this quarter. Can you sort of talk through the thought process on issuing at current valuation versus how you guys think about potentially buying back stock and what goes into that decision?
Sure. I think as we mentioned, we were looking at where we see Fed rate cuts coming later in the year and kind of opportunities to acquire higher-coupon assets at a discount, we thought now is the time to do that. We -- these assets on a current basis more than cover the dividend associated with that stock and have potential for upside as rates begin coming down. So we thought this was a good time to go ahead and acquire these kinds of assets.
Okay. And in terms of continuing to add assets, 2024 ahead of rate cuts, can you talk about how much sort of free capital you feel you have available to do that by deploying cash on hand versus potentially using more capital issuance to buy new assets in the near term?
Yes, sure. So we would look at -- there could be a couple of sources. Clearly, we have cash on hand, and the amount of cash and other liquidity that we would be willing to use is going to be a function of kind of where we see market volatility and rates. And as those come down, we can see deploying some of that into new assets.
As also, I mentioned, depending on a variety of factors, we do have callable securitizations. I mentioned, for example, those non-REMIC securitizations as those -- in particular, those are very high sec debt. And so there's opportunities to call and collapse those, and they have a higher percentage of performing loans, and we can convert those into REMIC and another non-REMIC. And so the sec debt on those on a blended rate could be lower. So that could be another source of capital.
So we have several potential sources of capital that we could use in addition to the capital markets. And we are -- we constantly look at those opportunities.
[Operator Instructions] Our next question is coming from Stephen Laws from Raymond James.
Just one last question on the ATM or follow-up. I think you said let's shoot in the low 5s. Stock's at [ $4.5 ] now. Like what's your valuation sensitivity? You mentioned the yield versus the mid-teen returns. So is it strict with the dividend yield? Or how do you guys think about your valuation sensitivity around the continued issuance on ATM?
Yes. I mean it's a combination of those. And I think where the stock is now, I think we're -- there is a limit in terms of how much dilution we'd be willing to handle even though we could cover the dividend yield. And so we do look at those factors.
So it's a combo. We want to make sure that we cover the dividend yield, and we need to have upside from there, and the amount of upside we need depends on how much dilution. And so we'll have to make that trade-off. And that's kind of how we look at it. Obviously, where we were in the lower 5s was 1 calculation. In the mid-4s is a different calculation.
Great. And then as a follow-up, as you think about your outlook and potential upside -- I don't know if it's the long end or the short end or spread tightening or all of it. But if rates, say, drop 100 basis points, how does that change the return expectation versus the mid-teens kind of current return on these new investments?
So do you want to add?
Yes. Yes. I think when we talk about it, it's primarily -- especially, as Phil mentioned in his comments about purchasing the non-Agency subs, which are not financed right now. So to the extent the funding costs go down and we are able to finance them, the returns would be boosted further.
So it's primarily a function of funding rates, not necessarily rates going down in the long end. Obviously, and Phil mentioned in his comments, too, as securitization markets become more stable, which we saw like how [ deals ] priced in January. And yesterday, we kind of got a hiccup. To the extent they become stable and we are able to accumulate loans and securitize them in a stable macro environment, that's the sector that will be benefiting from the long end of the curve.
Right. So the potential upside would be tied to declining short end as far as the new investments go?
Yes, I think that's kind of fair.
Next question today is coming from Eric Hagen from BTIG.
How are you guys thinking about conditions in the securitization market related to interest rate policy at the short end of the yield curve? How do you even see that demand equation changing from securitized debt investors themselves and their appetite for more debt, especially as you think about maybe calling some of the debt that you have in your securitization pipeline already?
So as I just said, Eric, we would like to see the securitization markets a little more stable before we get into the markets again. So we are going to be accumulating loans. We saw in January, especially in the non-QM space, the AAA is priced in a range of like 143 to 250 basis points. And as I said, if this -- we get a little more clarity in the first half of the year, the loans that we would have accumulated are the loans that we're going to be securitizing.
Okay. But how are we thinking about just conditions with respect to calling the pipeline of debt that you have, which is callable right now? And just where you can issue some of that debt and maybe extract some capital?
Maybe [indiscernible]. Currently, the sec debt if we lock it in at the current rates, it is locked in for a longer period of time. So we are looking for the front-end rates in general market to be like the rates to come down so we can get better funding rates for a longer term.
But it also depends on what is available in the market. So sometimes it might be lucrative to take on a little expense on funding if we are getting very accretive assets in the marketplace.
Right. No, that does make sense. How are we also thinking about the fixed to floating rate preferred? I mean it looks like that's going to reset this year. Do you think there's situations or conditions where you might look to call those or redeem them as they turn into their floating [ legs ]?
Yes. I think we evaluate all those options. And I think as we mentioned right now, we think that with cuts coming in the future at the end of the year and through next year that while we expect the floating rate to reset higher, we see that coming down over time and probably looking to deploy capital and buying new assets rather than, at this point, retiring that. But that's a case-by-case and fact-based analysis that we're constantly looking at.
So things could change, and we could come to a view that it would make more sense to actually start repurchasing it. But that's part of the mix of how we think about deploying capital in new investments versus reducing that expense.
Next question today is coming from Trevor Cranston from JMP Securities.
Just one follow-up. Do you guys have an updated estimate on where book value stands so far in the first quarter?
Yes, sure. So while the most recent Fannie RPL sale traded pretty well, with the selloff in rates since quarter end and especially yesterday, which accelerated, I would say like we are down roughly 1 point or so.
Percent.
1%.
We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.
This is Phil Kardis. I'd like to thank everyone for participating in our fourth quarter and full year earnings call. And we look forward to speaking to you on our earnings call for the first quarter 2024.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.