Q1 2022 Chimera Investment Corp Earnings Call

[music].

Good day, ladies and gentlemen, and welcome to the car Mirror Investment Corporation first quarter 2022 earnings call. All lines have been placed on a listen only mode and the floor will be opened for questions and comments following the presentation.

You should require assistance throughout the conference. Please press star zero on your telephone keypad can reach a lot operator at this time. It is my pleasure to turn the floor over to your host Victor Falvo <unk> head of capital markets, Sir the floor is yours.

Thank you operator, and thank you everyone for participating in <unk> first quarter 2020 to.

Earnings Conference call.

Before we begin I'd like to review the Safe Harbor statements.

During this call 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.

They 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 contents 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.

I will now turn the conference over to our CEO and Chief Investment Officer Mohit Mario.

Thanks, Nick.

Good morning, and welcome to the first quarter 2022 earnings call for Chimera Investment Corporation.

Joining me on the call today are children, <unk>, our president and Chief operating officer.

<unk>. This one often our chief financial Officer, and Vic Falvo <unk> head of capital markets.

After my remarks, I will review the financial results and then we will open the call for questions.

Last year, we began to prepare for a higher rate environment by optimizing our liability structure, which included the re securitization of $6 billion of our loans with long term fixed rate coupons.

As rates began to rise this year, we have begun implementation of the next leg of our strategy to acquire high yielding residential loans, while continuing to obtain long term financing through securitization.

The dramatic increase in headline inflation and widening of credit spreads, which began late last year continued during the first quarter of 2022.

The Federal Reserve Board began to raise short term rates and announced it was stopped new purchases of agency mortgage backed securities and possibly reduce its current treasury and MBS portfolios.

Markets reacted swiftly to Fred pronouncements, causing two year Treasury notes to increase by 160 basis points 10 year Treasury yields increased by 83 basis points and 30 year mortgage rates increased by approximately 160 basis points.

All occurring over the course of the first quarter.

This combination of high volatility and higher interest rates impacted our book value, which was down 14% for the quarter.

At the same time this environment created opportunity for <unk> to increase our investment portfolio residential loans at yields much higher than were available last year.

This quarter, we committed to acquire about $800 million of re performing residential loans.

So you have settled $570 million into our loan warehouse and expect to settle on the remaining loans early in the second quarter.

New purchase activity, coupled with the settlements of loans purchased late in 2021.

Enabled us to settle on nearly $1 billion loans in the period.

We expect these loan acquisitions to contribute to our earnings immediately and look to add more loans as interest rates continue to rise.

In February we sponsored CIM 2022 are one our first securitization of the year collateralized by seasoned performing residential mortgage loans with a principal balance of $328 million.

The loans had an average coupon of 461% and our 169 months seasoned.

Securities issued by CIM 2022 Dash are one with an aggregate balance of approximately $264 million were sold in a private placement to institutional investors.

The senior Securities were rated AAA by Fitch, and <unk> and represent approximately 80% of the capital structure and have a 3% fixed rate coupon.

We retained $64 million of subordinate notes and interest only securities for investment.

Chimera retained an option to call the securitized mortgage loans at anytime beginning in February 2027.

Considering the market volatility and increase in interest rates. This period I would like to take a moment and discuss our liability structure. We have worked so diligently to establish for our balance sheet.

Securitization remains our primary source of funding for our mortgage assets.

This debt is permanent and has been structured with call features that enable us to optimize our liabilities over the long term.

At quarter end $8 1 billion of securitized debt represented 70% of our mortgage asset funding.

Seven 9 billion, representing 98% of our securitized debt has fixed rate coupons.

The average rate of our eight 1 billion outstanding securitized debt as of March 31 was two 5%.

The remaining 30% of our liabilities are comprised of our repo our secured financing commitments.

At quarter end, we had $3 4 billion secured financing agreements representing only one turn of recourse leverage on our total capital.

Over the $3 4 billion total $1 9 billion or 56% of our secured financing is used to finance non agency MBS, which includes our retained securities from Securitizations.

This portion of our financing has ladder maturities ranging from one month out to three years.

64% of the $1 9 billion are structured with non mark to market or limited mark to market pricing arrangements on the underlying assets and only 36% have a mark to market pricing feature to the underlying assets.

The remaining $1 5 billion or 44% of our secured financing agreements are used to fund our warehouse loans and agency securities.

We intentionally have kept the duration on this portion of our financing to shorter term to provide maximum flexibility for future securitizations of our loans and the management of early prepayments received on our agency MBS.

The average rate on March 31 of our full $3 4 billion of secured funding was 253% up 23 basis points from year end.

Our assets are performing well and we believe our liabilities are well positioned.

The company currently has a share repurchase plan that place, which allows us to repurchase up to 226 million of our common shares.

Given the sharp movement in our share price relative to our book value. We plan to evaluate the benefits of share repurchases in conjunction with the added benefit of other investments to maximize the long term benefit to our shareholders.

To summarize over the past several.

Yes, we have accumulated a high yielding portfolio of residential loans and securities that had been primarily funded through securitization.

We have locked in a low cost fixed rate financing for this portfolio and are regularly utilizing call provisions to optimize our net interest spread.

Since the beginning of the pandemic, we have restructured our secured financing agreement to protect our portfolio during periods of high volatility and market dislocation.

Higher interest rates and wider credit spreads represent potential opportunities to grow our portfolio.

We have a large share repurchase plan our disposal.

And we believe we are well positioned to continue to maximize dividend income for our shareholders over the long term.

I will now turn the call over to <unk> to review the financial results for the quarter.

Thank you Mohit I will review <unk> financial highlights for first quarter of 2022.

GAAP book value at the end of first quarter was $10 15 per share and our economic return on GAAP book value was negative 11, 5% based on quarterly change in book value in the first quarter dividend per common share.

GAAP net loss for the first quarter was $281 million or $1 19 per share.

On an earnings available for distribution basis net income for the first quarter was $94 million or <unk> 39 per share for.

For onetime nonrecurring items, we had approximately seven tenths of income that was derived from securities called during the quarter.

Our economic net interest income for the first quarter was $138 million.

For the first quarter the yield on average interest, earning assets was 6%.

The average cost of funds was two 3% and our net interest spread was three 7%.

Total leverage for the first quarter was $3 five to one while recourse leverage ended the quarter one for one.

For the quarter, our annualized economic net interest return on average equity was 15, 6% and our GAAP return on average equity was negative 29, 72%.

And lastly, our first quarter expenses, excluding servicing fees and transaction expenses was $17 million down slightly from the previous year.

<unk> remarks, we will now open the call for questions.

Thank you the floor is now open for questions. If you do have a question. Please press star one on your telecom keypad at this time.

Ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad at this time.

Please hold on the call for questions.

Okay.

Okay. Our first question comes from Bose George <unk>. Please state your question.

Hey, guys. This is actually Mike Smith on for Bose.

Just one on the securitization markets can you just provide some color on whether or not some of the older inventory has cleared just wondering if some of the pressure has eased up and then as a follow up have you seen any changes in loan prices to reflect the wider spreads in the securitization market.

Hey, good morning, Mike This is mohit.

I'll start with your second question and then sort of address the first one.

As I mentioned in the opening remarks mortgage spreads widened quite significantly in Q1, which did adjust loan pricing irrespective of what happened in the securitization market, but the securitization market compounded that effect given.

The credit widening that took place in relation to just the market volatility.

A lot of the overhang, if youre talking about new origination.

Was absorbed and there was a significant amount of deal issuance relative to Q1 of 2021 and a much lower rate environment I think.

The pull through rates on what the production coupon was changed materially and the originators and.

Issuers that bought from originators did bring a fair amount of non QM and jumbo deals.

Unexpected and we touched upon this in our Q4 earnings call as well and Thats, where we saw a lot of spread widening in.

That also trickle down into some of the ERP all space.

The issuance was a much smaller percentage of overall new issue Securitizations.

Okay, Great. That's helpful. And then maybe just one on leverage.

Whats the level Youre comfortable running at and then maybe what would you need to see in the market.

What kind of going on offense here.

So I mean as we highlighted on the call. We have done on the offense. If we did add 800 plus million dollars of new loans to the investment portfolio.

Given the volatility of securitization that you just asked about is why we only completed one securitization so far as the market stabilized, which they seem to be doing here in Q2, we may bring more deals to the market to term finance some of the loan acquisitions. Our leverage did go up from <unk> 90 to one turn of recourse leverage for the <unk>.

Quarter.

We still have ample liquidity $1 5 billion in total.

That will you look to deploy as in either investments or like I said, given the hit to our stock price relative to book value as we are going to evaluate from a relative value basis, where to deploy the next.

Dollar of investment.

As far as what the composition of the leverage could be it's a function of the type of assets. We buy our focus remains on credit assets, but given the widening thats taken place in agencies, if you buy more agencies leverage with one a little bit higher but if it's more credit focused we would run leverage to where we are to generate compelling returns but.

The ROE will be the focus on determining where the next dollar of <unk>.

Cash goes.

Great Great. That's really helpful color and then just one more have you seen any changes to your book value So far in the second quarter.

Yes, given given again the continued move in rates both on the belly of the curve and the 10 year.

We project that book value to be down about 4% to 5% since the end of the quarter.

Great. Thanks for taking my questions.

Thanks.

Our next question comes from.

Trevor Cranston. Please state your question.

Hey, Thanks, good morning.

You commented a little bit on the sort of repricing of loans given the move up in interest rates and the widening of credit spreads.

Could you maybe go through.

Where you are seeing.

<unk>.

We are available for purchase in the market today in terms of price and yield.

And kind of where the ROE is on new investments today versus kind of what it was at the end of last year.

Sure so.

The better part of last year.

Our focus on the liability side of our balance sheet is again highlighted in the earnings remarks.

In the first half of the year last year, we actually didn't buy much in new loans, but.

But we were able to optimize the deals we had issued in prior years to lock in that lower rate financing in the second half of the year, we had more success in acquiring loans, but given the all in low level of yields loan yields whether it would be.

Season re performing non QM prime jumbo were trading on a spread basis to swaps plus mid one hundreds that number has widened out to maybe source plus 200, but the increase in all in rates has produced yields that are probably running mid high floors on loans today.

Like I said that effect isn't lost on the securitization market. So the demand to execute a securitization has also increased and based on where you could sell the top of the capital structure. You are looking at retained pieces, yielding probably low double digits at the moment.

Okay got it thats helpful.

The last thing the last thing I will say Oh go ahead, just make one last comment.

Loan market are leased on the seasonal performing side is.

This is not something that's being produced that already exists on average. These loans are 100 to 160 months season, depending on what comes out for sale. So the controls nature of that flow has protected sort of the spread widening that's occurred in some of the other new origination products.

Yesterday, Fannie Mae had their second loan until a year and based on early color it seems to have traded well and in.

In line with the spreads I just mentioned to you.

Okay got it that's good color.

In terms of the book value change.

Could you kind of roughly.

Talk about how much of that was driven by the movement in rates versus the movement in credit spreads and.

If theres any sort of net duration exposure.

On the portfolio at this point thanks.

Sure. So a lot of the book value movement as a function of rates like I said the belly of the curve moved about 165 million to 170 basis points from December through March.

The 10 year itself moved over 80 plus basis points over the same timeframe.

So that led to a large.

Movement in our book value.

From a credit perspective spreads were wider in sympathy with what happened to agencies.

With that I would say it was a 25%.

A reduction in book value was 75% of the change was driven by the rate movements.

As we as we sort of move past quarter end rates have continued to sell off and.

Both the 10 year and five year have moved almost I think 35% of the move they occurred in Q1 on the five year and almost 70% of the move that occurred in the 10 year. So far has been experienced in April and which is why again book value is down anywhere between 4% to 5% since the.

End of the quarter, but yesterday with the fed announcement, I think has given a little bit more clarity on what the fed is going to do there was a lot of chatter around a potential 75 basis point hike, but powell has sort of taken that off the table.

Dick's that there could be.

One or two possibly three more 50 basis point hikes and then they will see what the data shows in terms of inflation expectations. So I think thats provided a little bit more certainty on the rate outlook as we sort of move into the back half of the year here.

Okay got it I appreciate the comments thank you.

Again, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad at this time again Thats star one if you'd like to ask a question. Our next question comes from Doug Harter. Please state your question.

Thanks.

In the past and you've done a good job of calling and reissuing securitization to improve your liability structure. Obviously the cost of that has gone up but can you just talk about the potential to still do that and get the re leverage benefit or if there are other ways to kind of relocate those securitizations.

That's a good question and we highlighted in our Q4 earnings call that we do have a fair amount of deals that are either callable or will become callable in the calendar year 2022, and there's a page in our supplement that reflects that.

As you mentioned the cost of <unk>.

Issuing new debt has increased quite significantly from Q4 to today.

But.

As we evaluate the equity takeout from the deals and redeploying that today relative to issuing new debt.

Continuously monitoring that and as it stands today, that's not that attractive to do the additional new debt that would be issued.

It would be almost negative to where you could deploy the equity even if we were to repurchase debt and stock. So we will continue to evaluate that over the course of the year, but another way to think about it is each month that those deals remain outstanding and they pay down and they continue to delever as an additional dollar of equity REIT able to take out in the future once we do.

Do call those deals. So it is a source of liquidity for the company on a go forward basis.

I mean, I guess would there be ability to to put.

Leverage against that additional equity that's building without having to.

Redo the whole securitization and give up the attractive cost of funds.

Yes.

The subordinate notes that we retain the Securitizations continue to Delever, our repo financing counterparties would take that into account and we can optimize the <unk>.

Higher value of those assets over time in the form of additional borrowings on repo that would be another way to sort of tap into that equity.

Got it and then I guess.

That market has kind of had ebbs and flows I guess, how would you characterize.

The market there and your level of comfort kind of given the volatility of that financing.

Yes, I mean, I think if you look at the overall repo market for Q1, given the large rate move given the geopolitical.

Events going on that market has actually performed really well.

And especially as I mentioned with yesterday's fed announcement has given them a little bit more clarity on potential future.

Pat.

We don't necessarily see an issue there today, but again based on the liquidity that we have in the company and our current cash needs to the extent, we are comfortable and we find attractive opportunities, we will increase our leverage but more stuff on repo and one of the things. We touched upon we are very cognizant of the type of financing we are getting.

We would prefer non mark to market and longer tenor, but are you willing to weigh that against the cost of that type of financing relative to the investment opportunities, but we're pretty comfortable overall with where the repo market is today and the counterparties that we are dealing with.

Great. Thank you.

Thanks, Doug.

Again, ladies and gentlemen, if you would like to ask a question. Please press star one on the telephone keypad at this time, please hold while we poll.

Okay and it doesn't look like we have any further incoming questions. So I'll turn the call back over to Mohit for closing remarks.

Remarks.

Thanks, operator, and thank you everyone for joining us today, and we look forward to speaking to you on our Q2 earnings call.

Thank you. This concludes today's conference call. We thank you for your participation you may disconnect. Your lines at this time and have a great day.

[music].