Q2 2021 Chimera Investment Corp Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Komura investment Corp, second quarter 2021 earnings conference call and webcast.
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It is now my pleasure to turn the program over to Victor Falvo <unk> head of capital markets. Please go ahead.
Thank you Britney and thank you everyone for participating in <unk> second 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 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 day 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 CEO and Chief Investment Officer Mohit Mario.
Thanks, Nick.
Good morning, and welcome to the second quarter 2021 earnings call for Chimera Investment Corporation.
Joining me on the call today are chose <unk>, our president and Chief operating officer.
<unk>, our new Chief Financial Officer.
Kelly carbon our chief accounting officer, and Vic Falvo <unk> head of capital markets.
After my remarks, Kelly will review the financial results and then we will open the call for questions.
This quarter, we continued to make significant progress towards the optimization of our liability structure.
For the 6 months of 2021, we successfully refinanced 12 legacy Sim Securitizations supporting more than $5.6 billion of loans.
There is also on these transactions has lowered our overall cost of debt by approximately 245 basis points.
And we expect this cost savings to continue to benefit our shareholders in the future.
The housing market continues to be 1 of the most robust component of the U S economic recovery.
The National Association of Realtors recently reported sales of existing homes at $5.9 million annual units, but the median sales price of more than $363000 up.
Up more than 23% from a year ago.
Demand for single family homes remains strong while the inventory of homes available for sales persist near record low levels.
According to Black Knight data and analytics in June the national delinquency rate hit its lowest level since the onset of the pandemic and is now back below the pre great recession average.
The 30, plus day delinquency rate was reported at 4.4% of outstanding loans down 42% on a year over year basis.
Strong demand for existing homes higher home prices and lower delinquency rates provides strong fundamental support for <unk> large portfolio of seasoned low loan balance mortgages.
Interest rates on government bonds experienced a bowl flattening move in the second quarter.
Over the period the yield on 10 year Treasury notes fell by 27 basis points, while the yield on a 2 year treasury rose by 9 basis points.
Interest rates on money market instruments, including overnight repo remain near zero.
Investor demand for higher yielding fixed income products was strong and spreads on credit products continue to trade tighter.
Accordingly, the Bloomberg Barclays U S corporate high yield index ended the quarter at 375%, it's the lowest yield ever.
Tighter credit spreads coupled with low absolute interest rates have presented attractive market opportunities to refinance our existing securitized debt and secured financings at significantly lower costs.
As part of our continued call optimization strategy. This quarter, we called on refinanced 6 same legacy deals representing more than 1.5 billion of loans.
The new Securitizations successfully optimize our liability for the extraction of capital and lowering cost of debt.
Our April deals CIM 2021 dash are 3 and NR 3 on a combined basis had a total of $813 million of securitized debt supported by $977 million of loans.
The combined advance rate was 83%, enabling us to extract $125 million of capital, while lowering our cost of debt for these loans by 200 basis points to 2.1% 2%.
Hi, Mario retained $164 million of subordinate and Io securities as investment from these deals.
The new Securitizations have a calendar call dates are.
<unk> 3 financing will be callable, beginning April 2024, and the NR 3 financing is callable beginning April of 2022.
In June we issued 546 million CIM 2021 dash are for.
The deal consisted of $464 million securitized debt, representing at 85% advance rate and a $1, 97% cost of debt for these loans.
Dr for freed up $98 billion of capital and provided cost savings of approximately 180 basis points.
Chimera retained $82 million of subordinate and Io securities as investments.
The offer financing has a calendar call day, beginning June 2024.
We have provided additional details on page 8 of our earnings supplement to further assist you in the analysis of this quarter's Sim securitizations.
Securitizations has long been a cost effective and efficient financing vehicle for chimera.
In the first half of 2021, Chimera re securitization activity enabled us to take on capital.
The size and lower the cost of our outstanding credit financing.
And in conjunction with this year's re Securitizations. We have also refinanced several of our outstanding secured credit facilities.
We have made meaningful improvements with the average cost of our secured financing for residential credit assets in the second quarter at 3.5%.
Down from 4.9% at year end.
We have always been extremely prudent and diligent when making our long term investment decisions.
Our agency MBS portfolio as constructive as explicit prepay protection.
As interest rates have fallen and maintained at near historic lows, we have been active in managing our agency MBS to determine the best course of action between long term hold on gain on sale securitization are reaping benefits through explicit prepay penalties.
This quarter through the combination of prepay penalties received from our Ginnie Mae project loans and early Paydowns of non agency credit we generated 1 time nonrecurring income of $38 million.
Our prepaid penalties we received this year as proof of concept for many of the positive convexity attributes we have regularly discussed over the years.
Yeah.
Now at the midpoint of 2021, I believe we have made meaningful impact on our balance sheet.
We have re securitized debt supporting $5.6 billion of loans through 7 separate securitizations.
Lowered our cost of securitized debt by over 245 basis points.
Lowered the cost of our repo credit facilities by 140 basis points since year end.
With tired high cost debt and warrants incurred during the pandemic.
Issued 3 jumbo prime securitizations totaling $1.2 billion.
Purchased more than $200 million of high yielding fix and flip loans.
And increased our quarterly dividend by 10% to 33.
Securitizations of loans locked and stable long term financing for our loan portfolio.
We have successfully refinanced many of our outstanding legacy deals and we have an additional 5 deals with 1 billion of unpaid principal balance that are or will become callable over the next 6 months.
Looking forward, we continue to seek opportunities to further improve our liability structure.
And as always stay the course as a patient long term investor focus on investments to provide our shareholders with stable book value in a sustainable and attractive risk adjusted dividend.
I will now turn the call over to Kelly to review our financial results for the period.
Thanks, Mohit I'll now review <unk> financial highlights for the second quarter of 2021.
GAAP book value at the end of the second quarter was $11.45 per common share GAAP net income for the second quarter was $145 million.
Or <unk> 60 per share on a fully diluted basis.
Our core earnings for the second quarter was $130 million or <unk> 54 per share.
Economic net interest income for the second quarter was $173 million the yield on average interest, earning assets was 7% for the second quarter, while our average cost of funds was 2.6%, resulting in a net interest rate spread of 4.4%.
Total leverage for the second quarter was $3.3 to 1 well on.
Recourse leverage ended the quarter at 1 point or 2.1 for.
For the quarter, our economic net interest return on equity was 19% and our GAAP return on average equity was 18%.
<unk> expenses for the second quarter, excluding servicing fees and transaction expenses were $15 million down approximately $3 million from last quarter.
That concludes our remarks, and we'll now open the call for questions.
At this time, if he would like to ask a question. Please press the star and 1 on your Touchtone phone.
You may remove yourself from the queue at any cash question about on key once again that is star..1 if you would like to ask a question and we will take our first question from Doug Harter with Credit Suisse. Your line is now open.
Thanks, Mohit you mentioned.
The $38 million.
Our benefit from from Prepays.
Your presentation mentioned that 'twenty, 1 could you just go into what that other $17 million that you were referring to.
Sure. So the 38 comprises of $21 million of agency MBS Securities I recalled that it'd be explicit prepay penalties associated with them. In addition to that we had a handful of non agency legacy deals that were called.
Not by us, but by other holders of call rights and that led to an additional $14 million to $15 million of.
Penalties that we received.
I should say accretion as opposed to penalties on the non agency side and then some of the iOS that we hold up the Ginnie Mae project deals that were issued by third parties.
The other $2 million to $3 million that we received.
Do you have.
Andy kind of how that.
What that net.
The benefit from call it and see it has been in prior quarters.
So it hasnt been that.
It's been more muted than prior quarters, we've never had anything to this magnitude.
In the past.
These were deals that were purchases very early on in 2009.2010 at very deep discounts.
Hasn't been a meaningful number otherwise we would have pointed out on prior calls.
Great.
And then just shifting to kind of the new investment.
I guess what.
What areas do you see as most attractive today and.
What type of returns are you generating.
So.
We continue to focus on the business purpose loans, we think thats, a very attractive short duration assets.
Could you say is mid teens type of Levered returns.
We continue to grow that year to date as mentioned in the opening remarks, we have been successful in acquiring over $200 million.
We're continuing to expand.
Our.
Counterparties on where we acquire that but thats still a large area of focus for us.
In addition, the season the re performing space as shown from the re lever that we've done enough of our existing deals until a place where you could optimize.
Your equity finance holdings to a pretty decent levered returns.
Loan space has gotten crowded there has been some new entrants at a pretty aggressive but as I've mentioned on several calls on the past there is still a fair amount of loans.
The loan sales I would have to occur from the <unk> and other banks that will create opportunities in the future I mean, we've been extremely busy we've done 7 legacy season Prime Securitizations, we've done 3 jumbo securitizations.
And been bidding on loans on successfully but again, we are optimistic that things will come our way and we will be able to acquire investment in the future. We don't have to make any rash decisions given the liquidity and the earnings being driven by our current call strategy.
Helpful. Thank you.
And we will take our next question from Eric Hagen with BT <unk>. Your line is now open.
Hey, Thanks, Good morning, I was hoping to get your perspective on how the exploration of the foreclosure moratorium.
The portfolio and.
And what's the overall approach will be an extending any modifications to seasoned performing borrowers around the pandemic.
What percentage of the portfolio was still in a COVID-19 related forbearance.
So.
Overall, the delinquency pipeline of Rfps and re performing portfolio didn't really materially change.
Prior to the pandemic to post pandemic.
60, plus delinquency pipeline was around 9% I think it may have inched up to about 10%. This reverted back to in that same context now around 9% on the aggregate.
As far as what we plan on doing on extensions or other strategies as it relates to servicing given that all of these loans are in trust, we do not control the servicing.
Within our governing docs on the ppm of these deals that we issue there was a loss mitigation matrix that the servicers have to follow and they have to do best practices on their end. So we don't really have much control on the servicing of these deals on a go forward basis.
All else being held equal.
The exploration of the foreclosure moratorium.
Should investors see that as an incremental.
On a positive for the yield on the portfolio or does it is it really kind of a neutral event.
Honestly I mean, we didn't see that much of a cash flow disruption I mean, if you think about the portfolio composition. The average balance of our mortgage loan is under 100000. The average mortgage payment is just north of $800 a month.
From.
On a cash flow perspective, we didn't see much change as a result of the pandemic, but overall the mortgage universe as highlighted on the opening remarks that delinquencies have come down.
Baroness moratorium should be a positive from a cash flow perspective again, given the strong housing appreciation thats been experienced or a year over year, coupled with continued low mortgage rates, so anybody having challenges could potentially refinance or reset their rates lower to lower their payments.
Got it and then 1 housekeeping item on the on the credit portfolio, what's the what's the LTV in the portfolio at this point.
The loans held for investment of course.
Our loans held for investment that LTV is probably going to be probably mid eighties, but that number is from the time of those loans were acquired once we securitize those loans, we will update the bps and that number will probably go lower given again.
Or on housing.
HPA.
Got it okay. Thank you very much.
Thanks, Ed.
And we will take our next question from Bose George with <unk>. Your line is now open.
Hey, everyone. This is actually Mike Smith on for Bose.
Just on the funding cost declined from material to 2.6% I'm just wondering where do you see is going on in near term maybe.
Maybe second half of 'twenty, 1 and then how does that relate to.
Your expectations for run rate core earnings.
I mean, we've made both on the securitized debt side for the financing costs have come down quite significantly as well as on our recourse borrowings.
Given the low level of rates and the dealer appetite to finance those assets.
I think on the recourse side I don't really see much more improvement that could really take place given where spreads are but again it depends on the amount of cash sloshing on the system, which at the moment.
<unk>.
On the securitized debt side, we still have 5 deals between now and year end that are callable totaling 1 billion WPB.
And if you look at the supplement the last page of the supplement it highlights the deals that are callable the amount of balance of secured debt. That's outstanding there. So I think that could still drive earnings on the back half of the year.
Now if you look at where that debt is issued relative to where we've been able to get some deals done.
Good.
Be north of a 100 basis points reduction in financing cost on those deals.
Sure.
Great. That's helpful color and then just 1 more from me how is book value since quarter end.
So book value since going on all of the market has rallied spreads have been pretty staircase I would say is unchanged to where we ended.
June 30th.
Great. Thanks for taking my questions.
And we will take our next question from Trevor Cranston with JMP Securities. Your line is now open.
Alright, thanks, good morning.
On the on the income you guys got from the legacy bonds being called this quarter.
Just curious if theres any.
Particular reason you guys would point to.
As to why some of those deals.
It started to be called this quarter in particular.
And if it's something that was.
Widespread across Counterparties or if theres maybe.
1 particular counterparty on the market or something who's who's calling from <unk> legacy deals. Thanks.
Hey, good morning Trevor.
As it relates to.
Who is calling the deals I'm not really sure who owns our call rights on these transactions, but it was.
It's across shelves across different issuers on the legacy side that deals that got called.
Again, given how strong the new issue market has been in the securitization market spin. It is an attractive time to call deals and issue new debt.
Especially on top of where the new issue market is just better loan pricing is.
Is also supportive of deals getting calls so.
I am not surprised this activity has been taken place.
Since 2018, 19 slowed down meaningfully in 2000 and as a result of just COVID-19 as well as.
Forbearance moratoriums that as those as highlighted on the earlier question go away. We do expect this to pick up but it hasnt been that meaningful in prior quarters.
We highlighted at this time, just the amount of accretion that we did realize.
Okay, yes that makes sense.
And on your legacy non agency portfolio.
Do you have the number handy in terms of how long.
Many of those deals do you think are callable at this point is it pretty much all numbers.
Louis.
I don't have a number handy, but ill spitball at at around probably north of 80% and if you look at the legacy CUSIP that we hold those securities were issued back in 2006.2007 2008.
Most of those deals have either 10% to 20% cleanup calls and given we are now.
13 years into.
On the issuance of those securities I would expect on out of those have factored down to where they could be callable.
Today, but again on the aggregate portfolio number if I had to put a number on it I would say around 80% of our legacy assets are probably callable.
Okay perfect. That's very helpful. Thank you.
And we will take our next question from Stephen laws with Raymond James Your line is now open.
Hi, good morning, Mike.
The portfolio is a little smaller I know theres a lot of competition out there.
Just discuss with Rob on others.
The call activity.
It seems likely to take place, but can you talk about any other asset classes youre watching that that seem to fit the investment mandate you like from a credit standpoint.
Or do you really think you're going to continue.
Obviously, a narrow focus but just focusing on the same line.
Your line of assets you've done historically.
No.
From an investment standpoint, we look across the full gamut of stuff available in <unk> as well as commercial.
We've participated in the season re performing space, we've done Prime Jumbo deals we've done agency eligible investor deals and our focus on growing the business purpose loan portfolio. So it's across the gamut like I said, where we think best relative value opportunities success is where we want to deploy capital.
The space has gotten crowded in the past.
And we've been patient and still.
Picking small pools up here and there but.
In addition to the seasonal re performing loans that we've done we have done 3 jumbo deals in.
That market now as highlighted on prior earnings call is 1 that's interesting where at times. There is a great ability to securitize in times that widens out.
In a vacuum and create a challenging environment to issue those securities, but the way we've structured the business I think we want to be involved we wanted to be a repeat issuer has shown with the deals we've done and I guess im going forward still optimistic on acquiring loans and continuing to use securitization to fill.
Finance those vehicles.
Great.
Thanks for the color there and then to follow up a question earlier around Ltvs, if you take the.
Although the older vintage loans were re performing loans and look at I.
I don't know Mark to Mark from those Ltvs based on home price appreciation.
Looked at that math on kind of where does that number shakeout given current home prices.
We have and I'll touch upon this so as mentioned we've called 12 legacy deals totaling $5.6 billion.
Given that those were re levered into new Securitizations, when we completed a new securitizations, we got updated bps.
That $5.6 billion of loans in.
In the prior Securitizations, which were issued in 2016 and 17 had ltvs in the mid eighties.
We refreshed the PPO or the new Ltvs based on amortization over the last 4 years, coupled with home price appreciation was in the low 6 days. So it's been a meaningful drop in ltvs, both due to amortization on home price appreciation and if you transfer that to the rest of the assets that we own.
We would expect to see a similar trend down in Ltvs.
That's great color. Thank you for that the numbers there and then just 1 touch up on I think it was mentioned expenses were down about $3 million sequentially is that due to seasonality around some stock vesting in Q1 or was there another impact for the sequential decline.
Yeah. It was all it was all comp related.
Just a correction of that Q1 from stock vesting, which didn't reoccur in Q2.
Fantastic, Thanks, a lot and take care. Thanks Steven.
Yes.
And I will now turn the program back over to Mani for any additional or closing remarks.
Thank you and thanks, everyone for joining us on our call. We look forward to speaking to you on our Q3 earnings call.
This does conclude today's program. Thank you for your participation you may disconnect at anytime and have a wonderful day.
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