Q3 2021 Chimera Investment Corp Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Chimera Investment Corporation third quarter 2021 earnings conference call and webcast.
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It is now my pleasure to turn the floor over to Victor Falvo <unk> head of capital markets. Please go ahead.
Thank you operator, and thank you everyone for participating in <unk> third quarter 2021 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 of our most recent annual and quarterly SEC filings.
Okay.
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 most comparable GAAP measures.
Additionally, the content of this conference call may contain time sensitive information.
Accurate only as of the date of this earnings call.
We do not undertake.
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 third quarter 2021 earnings call for Chimera Investment Corporation.
Joining me on the call today are children our legato.
President and Chief operating officer.
Subra, Mr Nelson, our Chief Financial Officer.
Kelly Clarkson are.
Our chief Accounting Officer and.
<unk> fell below our head of capital markets.
After my remarks Super will review the financial results and then we will open the call up for questions.
This quarter and throughout the year, we have continued to bolster our liability structure.
<unk> activity and improvements made to our repo facilities both in rate tender.
And for the year, we re securitized 13 of our legacy re performing deals totaling roughly $6 billion.
Securitization has enabled camera to lock in long term non mark to market financing, while insulating our high yield risk retention assets from voluntary prepayments.
Actions taken this year has made a significant impact on the earnings and have reduced the cost of financing for our loan portfolio and non agency MBS by 140 basis points since year end.
We expect that many actions taken on our liability structure to have a positive impact on our earnings available for distributions for many quarters into the future.
Interest rates rallied to start the third quarter while.
While the yield on 10 year treasuries initially falling by 25 basis points.
The rally has failed to hold up in the market rhetoric picked up about concerning.
Inflationary expectations.
The federal reserve, providing clarity to the market about their potential underline of quantitative easing.
And despite intra quarter volatility the tenure ended the quarter at 1.49% yield.
Actually when it began in July.
The housing market continued to trend towards higher home prices with the case Shiller index showing year over year National home price appreciation of nearly 20%.
The largest gain in more than 30 years.
We expect positive HP to continue in the near term.
Mortgage rates remain low housing inventory remains tight.
And the economy continues to March from the global pandemic.
Investor demand for spread product remained strong this quarter with grants on U S high grade high yield indices hovering near all time tights.
These market conditions have yielded positive benefits or kind of a securitization business, while the resulting in considerable price appreciation of our residential loan portfolio and overall improvement of the company's book value.
This quarter, we continued execution of our cost optimization strategy.
In July we call their switch smelter eight 2017 dash RP to securitization.
Which carried a 4% cost of debt.
Subsequently, we sponsored 450 million CIM 2021 dash are five with re performing loans of which approximately $180 million from the previously called deal and the remainder provided from our loan warehouse.
We sold $383 million senior securities, representing 85% of the capital structure with a $1 99 average cost of debt.
Proximately 200 basis points below the cost of the previous smelter financing.
We retained an investment 67 million subordinate notes and interest only securities from the deal.
This securitization becomes callable bike Humira anytime beginning August 2024.
We also sponsored 435 million CIM 2021 Dash <unk>, our first agency eligible investor loan securitization of 2021.
We created and sold $408 million of securities, representing a 94% advance rate.
This deal is not consolidated on our balance sheet, however, camera invested $27 million in subordinate and interest only securities.
The Investor loan deal was rated by Moody's and Kroll and primary retained at 10% clean up call.
While we have made many long term improvements of our liability structure. This quarter, we made a significant amount of new asset purchases for our investment portfolio.
This quarter, we purchased and settled $583 million re performing loans with a 363 weighted average coupon.
The loans have an average balance of 241000, and our 15 year seasons.
In early October we securitized 354 million CIM 2021 dash, our sex with re performing loans from our loan warehouse.
We sold $336 million in notes, representing a 95% advance rate.
Highest advanced rate, we have received on re performing loans to date.
The average cost of debt for the <unk> deal is 153%.
Primary retained at $18 million investment in subordinate notes and interest only securities.
Dr. <unk> was rated by Fitch and <unk> and will be callable beginning September 2026.
We continue to expand our business purpose loan segment of our portfolio.
This quarter, we purchased $115 million and business purpose loans at an eight 4% gross coupon and a $6 seven coupon net of servicing and asset management.
These loans have compelling fundamental investment characteristics and a very short duration assets.
We currently finance business purpose loans in our loan warehouse, it's correct and this is an attractive net interest spread for the portfolio with a very little duration risk.
This quarter's BPL purchased bring our year to date total to more than $318 million and continue to seek additional opportunity to purchase additional business purpose loans and expand upon this business.
This quarter, we also committed to purchase $148 million on re performing loans for our portfolio.
These loans have a floor to weighted average coupon and our 178 months seasons.
The average loan balance is expected to be around 175000.
These loans did not settle prior to quarter end.
We expect the subtleties launch in the fourth quarter for future Securitizations.
In total this quarter, we committed to purchasing nearly $850 million in loans, which highlights <unk> continued ability to acquire desired mortgage assets. There are many economic and interest rate cycles.
Okay.
We have accumulated and maintained a large portfolio of seasoned performing loans over the last seven years.
These assets continue to produce high yields for the portfolio, while demonstrating a consistency in prepayments.
Many economic and interest rate cycles.
As we have stated in the past the delinquencies and default rates on our loan portfolio have outperformed our original expectations.
And over the last 12 months despite the pandemic.
<unk> continued to improve.
The homeowner and our loans have demonstrated resiliency overtime with many benefiting from the recent strength of the housing market.
Mortgage securitization has been a primary component of our business model for more than a decade.
We have utilized loan securitizations to help manage both our liquidity risk and mark to market risk as a primary source of financing.
Over the last six years, most of our securitization for structure with explicit call options, which has enabled us to take advantage of favorable market conditions available so far in 2021.
So the current strength of our balance sheet. We believe we can continue to seek new opportunities and grow our portfolio at the country begin to normalize and eventually exit from the Covid pandemic.
We strive to be best in class asset and liability of managers in the mortgage REIT industry.
Our primary objective is to provide our shareholders with a stable and sustainable dividend, while managing our assets and liability risks to the best of our abilities to minimize book value volatility into the future.
I will now turn the call over to <unk> to review the financial results for this quarter.
Thank you Mohit and good morning, everyone.
You May have noted from our earnings release. This morning effect of this period, we will no longer report on the non-GAAP measure core earnings and instead report on new non-GAAP measure earnings available for distribution.
While our terminology has changed our method for the calculation of earnings available for distribution is identical to the previous calculation of core earnings.
Okay.
Now I will review <unk> financial highlights for the third quarter of 2021.
GAAP book value at the end of the third quarter was $12 and put it on a cents per share.
And our economic return on book value was 10, 5% based on the quarterly change in GAAP book value and a third quarter dividend per share.
Yeah.
GAAP net income for the third quarter was $313 million or $1 30 per share.
On an earnings available for distribution basis net income for the third quarter was 102 million or <unk> <unk> per share.
$14 million or <unk> <unk> per share.
Earnings available for distribution as a result of income to seek on securities that have been called.
Economic net interest income for the third quarter was $149 million.
For the third quarter.
On average interest, earning assets was six 3%.
Average cost of funds was two 4%.
And on net interest spread was three 9%.
Total leverage for the third quarter was $3 one to one while recourse leverage ended the quarter at one for one.
For the quarter, our economic net interest return on equity was 16%.
GAAP return on equity was 35%.
On expenses for the third quarter, excluding service fees and transaction expense that.
$18 million up slightly from last quarter that concludes our remarks, and we'll now open the call for questions.
At this time, if you would like to ask a question. Please press star one on your Keypad Star one now on your telephone keypad.
Draw yourself from the queue you May press the pound key.
We'll take our first question from Bose George of K B W.
Hey, good morning, everyone. This is actually Mike Smith on for Bose, Congrats on a really strong quarter.
My first question is we've heard that RPM NPL dollar prices are pretty elevated.
She has made.
Returns on securitization as well as the less attractive. So I was just wondering if you could provide any color here and then maybe in certain instances. It makes sense to just calling zelle as opposed to calling securitize.
Sure good morning.
Kevin.
Mike I'm sorry.
Yes loan pricing, obviously has steadily risen during the course of 2021 and reflected in the strong performance of our book value This quarter.
But it's the credits that you pick and the securitization that you can execute the determined.
Our effective of our participants.
As we mentioned EBIT and a tighter environment for spreads on loans, we were able to acquire $850 million of loans in Q3.
We are looking to sell.
Securitize these loans and the <unk>.
Coming quarters.
And the amount of advance rates, we can achieve we think still generate attractive returns on the retained pieces.
To the tune of probably mid high single digits on the back end on a cash and a loss adjusted basis.
Some small leverage could be double digits pretty easily so we're still pretty optimistic on the liability of Securitizations. In addition to acquiring loans, even with where prices have got.
Great. That's helpful color and then just one more on the bps.
And a lot of M&A activity and there's certainly a lot of institutional interest in the space.
I was just wondering is this or any of this changed your expected returns or how you source learns.
Again, I think these are pretty short duration assets.
Which is an attractive thing right assortment with expectations of rates moving higher.
As we highlighted our gross coupon from what we've acquired.
Just north of 8% and on a net basis.
Hi success again, theres different niches within the business purpose loan space.
Haven't seen any.
The change in the returns being offered to US and then we can attain and like I said, we're looking to grow that subset of our portfolio more meaningfully.
In 2022.
Great. Thanks, a lot for taking my questions.
Okay. Thanks, Mike.
Our next question is from Eric Hagen of BT I G.
Okay.
Hey, good morning.
First question on the $240 million of unrealized gains in the period can you tease apart what the factors were that.
That led to that.
I felt like we came into the quarter with credit spreads already pretty tight I'm just wondering what the maybe some of the individual factors that led to that or.
Sure, Kevin I'll start and I'll, let that Sabra and Kelly.
Add if they found.
Anything sharp.
Question, just asked by Mike given how strong the loan performance and where pricing had gotten that.
That is the key driver of the book value appreciation and keep it to me.
Loan spreads tightened, an additional 40 basis points quarter over quarter.
And with an implied duration of around four to five five.
Five years, that's a meaningful up tick on our loans held for consolidation and investment right now.
That that was a key driver and we agree with you with express already pretty tight coming into Q3, most of the other spread products and securities that we hold in primarily unchanged for the quarter.
Subaru Kelly is there anything else we went after that.
No.
Pretty much summarized it well.
Alright.
Yes that was helpful, but what what were the factors individually like because there is there are.
A lower severity rate, that's being applied to the loans or is it you know what.
What are the <unk>.
Faster prepayment speeds, what what are the actual factors that are driving that.
Again, I think the obviously the performance of the credit speaks for ourselves so the speeds of up ticked a little bit given the low rate environment.
Home price strong home price appreciation of decreased Ltvs as we also discussed the Q2 call as well as the higher or lower ltvs, resulting in all in lower severity. So overall loss expectations are obviously gone down four for mortgage assets, but more so than that it's just the demand for the assets within the.
The secondary market as you guys know the <unk> are the largest seller. In addition to some banks and funds and just in the secondary market loan trading spreads were 40 basis points tighter quarter over quarter, which is driving.
Outside on our large residential seasoned portfolio.
So all the other metrics that you mentioned as it relates to performance have all improved leading to some price appreciation, but the net of it is just the secondary trading from that one still is very attractive.
Relative to other mortgage products in terms of an all in yield.
With upside to I guess long term performance.
Got it okay.
And then on the loan warehouse financing can you guys talk about how much capacity you have there.
They're just finance any potential growth in the portfolio.
Sure.
Over the third quarter, we bought $850 million all of which is going to be warehouse financed but as we've said.
MS calls our objective is to securitize dose as quickly as possible.
Our typical holding period on a warehouse line would be anywhere between two to three months with a securitization exit. So we have plenty of capacity to add to the lines. Currently if we saw opportunities between now and year end.
And.
Again for the securitization market is still pretty strong and we're looking to continue securitizing.
And in our opening remarks, we did do a securitization right after quarter end.
Pretty effective execution on it.
Right.
And then sorry, if I missed it but the 850 that you guys, but what was the breakdown between.
Fix and flip prime jumbo and our appeal.
So of the 850, we bought $115 million of that is fixed and flip.
And the remaining is all seat in re performing and none of that is prime jumbo.
The Prime Jumbo is not included got it. Thank you very much no problem. Thanks.
And once again to ask a question that is star one on your telephone keypad will move next to Trevor Cranston of JMP Securities.
Alright, thanks, good morning.
Good morning.
Alright.
Follow up on the question about ppl's than trying to grow that portfolio going forward.
We've seen some peers.
They will look to acquire lenders in that space as a way to sort of secure and asset flow.
Just curious if that's something that you guys have considered or you prefer to continue sourcing.
Directly.
Yes, I mean, we've seen obviously some of the activity M&A activity in the space.
Actively looking at that but given the captive relationships that we have been pretty successful in acquiring those assets over.
Over the last two years and especially in Q3.
I think you know.
Our track record even during Covid, where people are distressed we fulfilled all of our obligations and to.
To fund any loans, we have committed to has given us a lot more credibility in the space and I think we will be successful with or without M&A activity, just they'll be able to source close loans in the portfolio.
Okay got you.
And then also to follow up on the question about the warehouse capacity for continuing to grow.
From a capital perspective can maybe share your thoughts on you know how much room you guys have.
Yeah to keep adding assets to the portfolio and growing in 2022 before you potentially need to look at raising additional capital.
Sure I mean, we have we have north of $300 million of cash on balance sheet and that number has been hovering pretty high post the pandemic.
We have significantly brought down our recourse leverage down to one recourse leverage so between cash and unencumbered assets we have.
Plenty of capital to grow the portfolio.
Just wanted to be judicious in making sure we find the right opportunities.
First half of the year, our focus was on optimizing the liability side that remains the key theme for Q3, but we were able to successfully get some mortgage assets to the tune of $850 million.
K per.
Patients potentially later today from the fed.
Inflation that doesn't seem to be transitory and a potential higher rate environment and potentially a spread widening environment. We think it could create some opportunities to deploy the excess liquidity, we do have on balance sheet in Q4, and as we enter 2022.
Okay got it.
The last thing on the loan spread tightening you mentioned rich, which obviously impacted <unk> book value.
Have you seen that continue into the fourth quarter or would you say it's sort of.
Flattened off can you.
You get better you know commentary.
Sure.
Yeah, our expectation, but given sort of the quick move in rates to start Q4, coupled with a little bit of softening on the new issue front.
Led to some widening in the loan trading there was.
Actually a GSC loan sale that occurred yesterday.
On a full color, yet, but again I think those loans traded extremely well.
So really haven't seen a softening on the loan trading side as we have seen on again some of the security side as we head into year end and that I don't think Thats, a long term trend I think again given the.
That move in rates the expectations of higher rates have made people a little nervous after a pretty successful 2021, so I think that could be again, the transitional think but yes.
There is a dearth of cash on the sidelines looking to be deployed within the mortgage space I think any widening should be just the near term and go Mark back to you now.
Where it has been for the better part of 2021.
Okay. That's helpful. Thank you.
Thanks Robert.
And once again that is star one on your telephone keypad will move next to Doug Harter of credit Suisse.
Thanks can you just talk about kind of what changed.
And the market was it kind of your appetite or was it more supply that kind of led to the.
The increased activity in the quarter.
No I mean, our appetite has been as we've highlighted on numerous calls.
<unk> strong or course season re performing loans were just not as competitive would've been in the first half of the year I think some of the counterparties that we engage within Q3 or not your run of the mill kind of traditional sellers. So we were able to successfully negotiate.
Transactions.
Yes.
Less so in comp if you will and Thats why we had the most success.
Got it any any.
You know insights or share your thoughts as to whether that continues or is it more likely to be.
<unk> bidding process in the coming quarters.
Again, those opportunities that are a little more quiet well see what and far between but we think some will still come to the forefront just given how strong loan demand is and I think as I just highlighted.
If there is a slight widening.
<unk> pulled back it's been a pretty active year. So we were hopeful we could take advantage of that given that's been sort of a core focus and strength.
Pension and ourselves in that space from others.
Got it and just you know I guess.
How do you think about kind of the the on on the re performing book that you have where you would see kind of the current mark to market LTV on the book given given the strength of our home price appreciation over the past year plus.
Sure.
As we mentioned in our opening remarks year over year case, shiller winds up to buy it.
Yes.
And 30 plus years.
This does conclude today's Chimera investment Corp, Q3, 2021 earnings call. You May now disconnect everyone have a great day.
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