Q1 2021 Chimera Investment Corp Earnings Call
Okay.
Ladies and gentlemen, today's call will begin momentarily until that time, you will remain on music hold thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the Chimera Investment Corporation first quarter 2021 earnings conference call and webcast.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
He would like to ask the question at that time simply press star and the number one on your telephone keypad.
If your question has been answered or you wish to remove yourself from the queue press the pound key.
As the while posing your questions you pick up your handset to allow optimal sound quality. It is now my pleasure to turn the floor over to Victor Falvo <unk> head of capital markets. Please go ahead.
Thank you Tamika and thank you everyone for participating in <unk> first quarter 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 upon 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 statements disclaimers 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 earning supplement the reconciliation the most comparable GAAP measures.
Additionally, the content of this conference call May contain time sensitive information is accurate only as of the date of this earnings call.
We do not undertake and specifically disclaim any obligation to the update or revise this information.
I will now turn the conference over to our CEO and Chief Investment Officer Mohit Mario.
Good morning, and welcome to the first quarter of 2021 earnings call for Chimera Investment Corp.
Joining me on the call today are chosen <unk>.
<unk> and Chief operating officer.
Rob Colligan, our Chief Financial Officer, and Vic Falvo <unk> head of capital markets.
After my remarks, Rob will review the financial results and then we will open the call for questions.
This quarter, we took many proactive steps towards the portfolio optimization and the expansion of <unk> core earnings.
Key drivers of our performance include re securitization of mortgage loans and the refinancing of credit assets at lower interest rates.
The housing market continues to be robust across America.
And though longer term interest rates have risen since year end the interest rates available for residential mortgages remain very low by historical measures.
Home prices are increasing at their fastest pace since the first quarter of 2006 and on a year over year base of the S&P case Shiller Index reported an 11, 2% increase the at home price appreciation.
Strong housing demand coupled with the limited supply of homes available for sale provide strong tailwind in housing finance.
Home price appreciation is an important metric when evaluating future of mortgage credit performance.
Interest rates on 10 year U S treasuries, the rose 83 basis points of this quarter, while short term interest rates remain near zero.
The yield curve steepened over the period with the spread between two year and 10 year Treasury notes doubling to 158 basis points on market concerns of future inflation expectations.
The Federal Reserve policy remained unchanged this quarter and the fed indicated its belief that recent signs of inflation are expected to be short term in nature and are elevated due to pandemic related issues.
Credit spreads on fixed income products tightened as investors continue to seek higher yielding investments for their portfolios.
The <unk> high yield index ended the quarter tighter by 57 basis points, while spreads on AAA rated securitized re performing loans tightened by end of approximately 15 basis points.
The current market conditions have presented a unique opportunity to optimize <unk> liability structure.
Locking in low cost financing for many quarters into the future.
As part of our call optimization strategy. This quarter, we exercised our call rights on six outstanding deals representing $4 1 billion of residential mortgage loans.
In February we issued $2 1 billion CIM 2021, <unk> or one.
And 233 million CIM 2021, cash and our one.
The mortgage loans for both the Securitizations were from call and the termination of three Securitizations previously issued in 2016.
The securitization has created $1 9 billion of new securitized debt at a weighted average cost of two point of 4%.
The terminated that had $1 7 billion outstanding as of <unk>.
<unk> cost of five 2% of savings of more than 300 basis points.
In March we issued one 5 billion CIM 2021 dash, our two and 240 million CIM 2021 Dash NR too.
The mortgages for both Securitizations from from the call and termination of three same Securitizations previously issued in 2017 and 18.
The March Securitizations created $1 5 billion up new securitized debt at a weighted average cost of $2 two 4%.
The terminated that had $1 2 billion outstanding where the previous cost of $4 two 2% of savings of about 200 basis points.
The higher advance rate on these four securitizations enabled us to release equity locked it from the prior securitizations and lower our cost of securitized debt by 265 basis points.
The retained tranches from the Securitizations were financed with non mark to market repo.
We expect to see the full benefits of all four securitizations in the new quarter.
Last week Chimera issued another intra quarter press release, highlighting the continuation of our call optimization strategy.
For the month of April we issued 860 million CIM 2021 or three.
And 117 million CIM 2021 Dash <unk> III.
The mortgages for both Securitizations, where from the call and termination of <unk> deals previously issued in 2017.
The April Securitizations created $813 million of new debt at a weighted average cost of $2 one 2%.
The terminated that had $682 million outstanding where the previous cost of $4 one 4%.
Savings of 200 basis points the.
<unk> three and <unk> three deals closed in late April.
Securitizations of assets is a critical component of <unk> business model.
It provides low cost long term non recourse debt for mortgage assets on our balance sheet.
Securitized debt represents nearly 70% of <unk> liability structure.
We expect all of the new Securitizations issued this year to provide durable portfolio of income for many years to come.
At the end of March <unk>.
<unk> paid off $400 million, 7% secured financing and retired for cash the associated warrants on the approximately 20 million shares.
The cash cost on the warrants came out of 10% discount of the value of our common stock and then eliminated any future equity dilution on the shares.
The equity recaptured from our first quarter of Securitizations enabled us to terminate the debt early and rebalance our liability structure.
Our secured financing now stands at $4 billion down from $4 6 billion at quarter end.
The weighted average rate on our secured financing at the end of March was two 7% down 70 basis points from three 4% at year end.
The optimization of our securitized debt combined with the continued improvement in our secured financing positions chimeras portfolio to reap the long term benefit while maintaining a little recourse leverage.
On the asset side of the balance sheet this quarter Chimera purchased and securitized in our CIM 2021, J, one and J two deals of total of $884 million Prime jumbo loans.
Separately through a series of transactions, we purchased 166 million high yielding business purpose loans.
The weighted average coupon on these loans was eight 5% and have an expected portfolio yield of 7%.
These loans are short duration and are currently being financed in our loan warehouse.
Our agency MBS portfolio continues to perform well as expected.
The increased rate volatility during the quarter, we proactively managed our agency MBS portfolio.
This quarter, we sold $182 million Ginnie Mae project loans generating $14 million in realized gains.
In addition, seven Ginnie Mae project loans for coal during the quarter totaling $146 million.
Unlike traditional agency pass throughs Ginnie Mae project loans carry explicit call protection and due to this feature we collected approximately $14 million of interest income through PPA of penalties.
As we look forward into the second quarter.
Housing market remains strong and provides the added benefit from improved credit performance.
<unk> portfolio of seasoned low loan balance loans continued to generate solid top line performance, while demonstrating low sensitivity to prepayments.
Through the end of April we have re securitized five 1 billion loans.
Our cost of financing and freed up capital to help pay down higher cost debt.
And the where the remainder of 2021, we have eight additional deals with the approximately one $7 billion unpaid balance from potential the re securitizations.
<unk> portfolio is currently structured to offer our shareholders an attractive dividend relative to our low recourse leverage.
As we near the post pandemic World Chimera is well positioned to grow our portfolio with additional income opportunities.
And now I'll turn the call over to Rob to go over the financial results.
Yeah.
Thanks Mohit.
I'll review <unk> financial highlights for the first quarter of 2021.
GAAP book value at the end of the first quarter was $11 44.
GAAP net income for the first quarter was 139 million or <unk> 54 per share.
On a core basis net income for the first quarter was 87 million or <unk> 36 per share.
Economic net interest income for the first quarter was $136 million.
For the first quarter the yield on average interest, earning assets was six 4%.
Our average cost of funds was three 3%.
And our net interest spread was three 1%.
Total leverage of the first quarter was $3 six to one while recourse leverage ended the quarter at one one to one.
For the quarter, our economic net interest return on equity was 15%.
And our GAAP return on average equity was 17%.
Expenses for the first quarter, excluding servicing fees and transaction expenses.
The <unk> $18 6 million up slightly from last quarter.
That concludes our remarks, and we'll now open the call for questions.
At this time, if you'd like to ask a question. Please press star one on your telephone keypad.
Again, if you would like to ask the question Press Star one.
So just a moment to compile the Q&A roster.
Your first question comes from the line of Doug Harter with credit Suisse.
Thanks.
Rob can you just talk about what was the factor that drove the decline in book value of.
This quarter.
Sure the primary driver of that was paying the warrant.
It was about $220 million or 95.
Outside of that book value was relatively flat.
It's the markups and markdowns loans in particular were up in the quarter.
Agencies, what the increase in rates were down.
In non agencies were down slightly but.
I think all of that all such pretty cleanly I think the biggest drivers DFS is the warrant for the quarter.
Great. Thanks, Rob.
And then.
I guess as you look at.
Kind of incremental dollars that youre, putting to work where where are the most attractive opportunities that you see today.
Hey, Doug this is mohit so.
As we mentioned in the opening remarks, we are still focused on acquiring more business purpose loans given the rate environment. We're in keeping the duration short on those assets of helpful and it creates a pretty.
High yielding assets for us on the cash basis of 717% and by the some financing on the warehouse line Youre looking at very high teens to almost 20% Levered returns.
We are still committed to our <unk>.
<unk> and re performing loan strategy as you can see the market is still pretty strong on the new issue side as reflected in the Securitizations, we've been able to do.
Q1 was relatively quiet in terms of loan sales the <unk>.
<unk> are the largest supplier their first loan sale happened at the very end of the quarter. So there was not much to sort of focus on on that side, but we still think they will have between the $2 $18 billion of the loans to sell so we will continue focusing on that and using securitization to enhance the <unk>.
<unk> and returns.
Great. Thanks, Mike.
Yes.
As a reminder to ask a question press star one on your telephone keypad your net.
Question is from the line of Bose, George with the K B W.
Hey, everyone. This is actually Mike on for Bose.
I was just wondering if you can talk through what went into the decision to raise the dividend is there any expectations for capital deployment or changes in leverage your funding cost effectiveness.
Hey, Mike I think it's all of those right I mean as you can see from the re lever that we've completed the April which represent about 70% of what we came into the year looking to do the average cost savings of over 265 basis points. If you look at our overall recourse repo some of the.
Financing, we took in place last year was pretty pretty expensive data stepped down quite a bit I think it's about a 70 basis point drop.
The lack of assets that we were able to find in Q1 as I just mentioned on the earlier question gives us the ability to.
All of that capital and from.
From the second half of the year here as the GSE sales the ramp up so I think the earning power of the company is driven by the re lever as given the cost savings and that's what gave the board comfort to increase the dividend and <unk>.
Investment opportunities become available the additional equity we freed up from the three levers give us kind of a.
The good position to add assets on a go forward basis.
Great.
Helpful Color and then can you just provided of quarter to date book value estimate.
Right of sort of have rallied since March 31st.
But I would say.
Credit spreads are probably flat to where they were on March 31.
As our agency spreads I think book value would be unchanged.
Over the last 30 days.
Great. Thank you for taking my questions.
At this time there are no further questions.
Hi, Thanks for taking it.
Thank you everyone for joining us on our Q1 call. We look forward to speaking to you all on our Q2 call.
Thanks.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Sure.
The.
<unk> growth.
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Moving on.
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Your line.
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