Q3 2022 Chimera Investment Corp Earnings Call
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Good day, ladies and gentlemen, and welcome to the Chimera investment third quarter 2022.
Earnings Conference call.
All lines have been placed on a listen only mode and the floor will be opened for questions and comments. Following the presentation. If you should require assistance throughout your conference. Please press star zero on your telephone keypad to reach a live 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> third quarter 2022 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 statements disclaimer in our earnings release in addition to our quarterly and annual filings.
During the call today, we will 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.
Is accurate only as of the date of this earnings call we.
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.
Yeah.
Good morning, and welcome to the <unk> third quarter 2022 earnings call for Chimera Investment Corporation.
Joining me on the call today are <unk>, <unk>, our president and Chief operating officer.
Subra this announcement, our chief financial Officer.
And Vic Falvo <unk> head of capital markets.
After my remarks, David will review the financial results and then we will open the call for questions.
Yes.
Before we begin I would like to congratulate all the <unk> employees and members of our board of directors past and present as we celebrate our 15th anniversary as a New York Stock Exchange listed company.
I'm very proud of the team we have built and very much appreciate all their contributions to the company.
Sure.
While elevated market volatility in the third quarter has led to higher rates and wider spreads putting further pressure on our book value. We believe this has created several opportunities for camera on both sides of the balance sheet.
In particular to the end of October we've been able to increase our cash position.
Increase the amount of non mark to market financing and either added or committed to add new investments to our portfolio.
And it's been a busy period for us, which I will discuss in more detail in a moment, but first let me describe the overall market and how that translates to our portfolio and expectations.
Capital markets have been volatile this year.
Buffeted by global complex high inflation.
Rapidly rising interest rate environment, and a weakening U S economy.
Inflation, which federal reserve officials have believed to be transitory in nature last year has turned out to be persistent for the consumer price index, reaching eight 3% on a year over year basis in September .
Here are some mortgage rate shock to the consumer will have an impact towards slowing down the economy and ultimately lead to lower rates as many consumers will have less disposable income to spend.
<unk> portfolio of residential mortgage credit is unique and differentiated amongst our peers.
It is well season and has experienced many interest rates and economic cycles.
We have approximately $1.2 billion of non agency RMB S, which is largely comprised of opportunistic purchases made after their previous housing crisis.
This portfolio has provided double digit returns for a long period of time for our portfolio and we expect it to continue into the foreseeable future.
And since 2014, we have amassed an $11.8 billion portfolio of residential mortgage loans with substantially different characteristics than available through typical mortgage banking channels used by banks and traditional mortgage backed security investors.
Our loan portfolio consists of 115000 loans with an average loan balance of $102000.
The loans are on average 15 year season, and an average loan to value at origination was 83%.
Importantly, 88% of our loans were originated in 2007 or earlier.
Which means homeowners have been making mortgage payments on their homes for 15 years or more.
And the portfolio is geographically diverse with only three states, having geographic concentrations above 5%.
Overall this portfolio is different.
A small loan size equates to low monthly mortgage payments.
The loans is afforded many of the homeowners a reasonably long period of time to capture home price appreciation and or mortgage amortization.
And there was a long and demonstrated history of monthly mortgage payments speed by the homeowner.
All of these factors are very important feature has been evaluating a mortgage borrowers paying ability.
Our season Reperforming portfolio is a cornerstone of our business and we believe our portfolio of season Reperforming loans will continue to outperform the market.
We believe market conditions with higher interest rates and wider mortgage spreads presents new accretive investment opportunities.
Since the beginning of the year, we have been scaling into new investments.
We believe our patients and investment discipline throughout this year will benefit our shareholders over the long term.
Now I will take you through a recent activity.
During the third quarter of 2020 to be committed to purchase $687 million residential mortgage loans.
211 of this total settled in October .
We expect to close $476 million loans into a long term non mark to market structure, which we anticipate will generate double digit returns.
Due to the delay in settlement, we expect to see the full benefit of these loans in 2023.
Additionally, we purchased and settled on $66 million of business purpose loans during the third quarter of 2022.
As we have mentioned in the past we liked alone characteristics associated with business purpose loans.
They have short duration and provide good spread income for the portfolio.
In total we committed to purchase $753 million loans in the third quarter.
As it as of the end of the quarter, 96% of our capital was allocated to residential credit assets.
Securitization remain the primary source of financing of our loans.
In September we sponsored CIM 2022 dash are three.
<unk> securitization of seasons Reperforming residential mortgage loans for the principal balance of $370 million.
Securities issued by CIM 2022, or three with an aggregate balance of approximately 284 million were sold in a private placement to institutional investors.
The senior Securities represented approximately 77% of the capital structure.
We retained subordinate notes and certain interest only securities with an aggregate balance of approximately $86 million.
We also retained an option to call the securitized mortgage loans at any time beginning in September of 2027.
Our average cost of that for the securitization is 5.8%.
As of the end of the quarter securitize that represented 72% of our total financing with an average cost of 2.7%.
And 98% of our securitized debt is fixed rate.
Largely because of securitization this quarter, we reduced our overall recourse financing by 328 million.
On the remaining 28% of our financing we have kept a portion of our secured credit financing and either non or limited mark to market facilities.
This quarter, we extended a maturing $489 million non mark to market facility by an additional 29 months to February of 2025.
We continue to believe these facilities are valuable component of our liability structure.
The third quarter experienced a significant increase in interest rate volatility.
Given the market outlook for higher rates for an extended period, we entered a $500 million two year and a 385 million five year interest rate swap.
The swaps complement the 1 billion swaption, we entered in queue too. So that we may partially hedge are borrowing cost over a longer period.
We expect to manage our derivative hedge position in conjunction with our asset and liability framework.
In total during the third quarter, we entered into $885 million pay fixed interest rate swaps.
And pulse quarter and we.
Ended October was a possibly $350 million of cash on our balance sheet.
Entered an additional $1.1 billion of pay fixed interest rate swaps.
Entered a new two year non macho markets secured financing facility for $250 million to finance retain securities from our securitization and.
And sponsored $145 million.
2022 dash and our one with the existing laws from our warehouse.
These transactions are further strengthened cameras liability and liquidity position since quarter rats.
Throughout 2022, we have manage our balance sheet to lock in long term funding, while seeking opportunities to have higher yielding mortgage assets to our portfolio.
We have maintained to lower recourse leverage and stuck to our discipline of carrying non are limited mark to market financing for many of our subordinate credit assets.
And while markets have been challenging since the beginning of the year.
Closed are committed to acquire $1.6 billion of loans.
Completed five securitization totaling 1.6 billion.
Purchased a $50 million of our common stock.
<unk> nearly $3 billion hedge transactions to protect against further increases in interest rates.
And expect to add new credit financing partners, bringing a knot and limited mark to market facilities to nearly 50% of secured financing.
We believe our credit portfolio of strong and we will continue to outperform other mortgage assets in the marketplace.
Tomorrow is a strong believer in synchronization. It provides a stable non recourse longterm financing.
You have taken many steps to bolster our balance sheet. So that we can whether the current economic storm.
We believe we are well positioned to take advantage of a new market opportunities and that our patients and investment discipline benefit our shareholders over the long term.
I will now turn the call over to Subra to review the financial results for the quarter.
Thank you Mohammed I will review come at Us financial highlights for the third quarter of 2022.
Gap book value at the end of third quarter was $7.44 per share in our economic return on Gab book value was negative 13% based on the quarterly change in book value in the third quarter dividend Gotcha.
GAAP net loss for the <unk>.
Third quarter was 205 million or 88 cents per share.
On an earnings available for distribution basis net income for the third quarter was $63 million or 27 cents per share.
Our economic net interest income for the third quarter was $104 million.
For the third quarter.
On average interest owning assets was 5.5%.
Rage cost of funds was 3% and a net interest spread was 2.5%.
Total leverage for the third quarter was 3921, while vikas leverage ended the quarter at 1.1 to one.
For the quarter hour annualized economic net interest return on average equity was 14.8%.
And our annualized gap return on average equity was negative 26.5%.
And lastly, our third quarter on expenses, excluding servicing fees and transaction expenses $15 million consistent with previous quarter.
Includes Ah remarks, we will now open the call for questions.
Thank you for how open for questions. If you do have a question you May press star one on your telephone keypad at this time if your question has been answered.
Remove yourself from the queue by pressing one again, ladies and gentlemen that star one to ask a question and our first question comes from Kevin Lee from RBC capital market cannot.
Hey, good morning, and thanks for taking my question.
A lot going on in terms of the financing side between the extending the non mark to market and the rate swaps you've been entering into just wondering if you could talk a little bit about how you think funding costs could trend over the near term given all these changes and importantly, how responsive wood.
Caused b two rising rates. Thanks.
Hi, Good morning, Ken This is not hey, that's a good question.
As we entered 2022 the expectations of the fed from where it started to where it was going to end, but the magnitude of about three to four rate hikes, obviously as we mentioned in the opening remarks that have gone much further and yesterday I went to an additional 75 basis points for the fed funds rate to be at 4%.
And as a result of how quickly the expectations, whether if that's going to change is why we started laddering into swaps and had just to protect our financing costs.
Over the last two quarters, and even posed quarter and so.
The mass majority of our recourse borrowings are floating rate nature, so any adjustments in the index and the fed funds rate translates into an increase in financing costs, but these hedges will lock and over the next two to three years locked in right with the spread <unk> finance on but it.
Spread perspective in terms of the <unk> are you looking to finance there is still ample cash at those spreads to finance those assets. So it's more of the the benchmark rate as opposed to the spread that that's a bigger concern for us.
Gotcha Gotcha very helpful. There and appreciate.
Just one follow up if I may I appreciate the discussion on the <unk>.
And and realizing that much the the regular season, but wonder if you can just talk about the.
Potential impact of slowing housing market and the potential home price declines.
In terms of Reggie loan valuations or non agents devaluations. Thanks.
Sure so the.
Differentiator for us on our loan portfolio is the the.
The vast seasoning that the portfolio heads.
The origination LTV was 83, so if you assume that 85% of the portfolio was originated prior to 2007, there's been 15 years of natural amortization, coupled with some pretty strong HPA. So we think the updated R.
HPA adjusted amortize adjusted LTV in the portfolio is closer to 50.
So from a credit performance standpoint that gives you a lot of equity to play with.
And if you look at the average loan balance of $102000. The monthly mortgage payment is sub $800 a month and.
And if you just compare that to the change and mortgage right from the start of the year to now.
A $400000 mortgage that mortgage payment adjustment would be $900 for these borrowers have gone through different interest rate cycle different credit events. So we think there's going to be really not a material change given the lack of housing alternatives that these borrowers have.
Gotcha.
[noise] helpful. Thanks again.
Thank you and our next question comes from Trevor crashed in from JMP Security's Gotta transfer.
Hey, Thanks, good morning.
Can you guys talk a little bit about how the high level of volatility in the market is impacted your.
Investment appetite.
Given the risks.
There can be a big move and raped spreads.
The time period, when you're required of loans and what is securitization takes place.
That's R. Again, a good question and one we've address on sort of other calls as well like our approach is not necessarily aggregate loans in many bulk size.
We would buy bulk production and warehouse them to transfer servicing and ultimately to securitize. So the period of time from.
Committing to a trade to funding a traitor securitization return it to look at it from the 60 to 90 day basis from a turnaround perspective.
So we tried to limit how much exposure, we have two spreads and rates adjusting now this year has been unique given how quickly rates have moved in Q3. The two year moved 130 basis points of five year moved 100 basis points and the tenure moved 90 ish basis points. So.
It made it a bit challenging environment on top of the amount of issuance in the new issue market, but again, we do take warehousing risk.
And knew that as much as possible with a quick turnaround that I just mentioned.
Okay got it.
And then in the in the post quarter update you mentioned, the 476 million overwhelms.
I think you called it off they were going to be placed into a long term non mark to market structure can.
Can you explain exactly.
You know what that is.
Why are you are you.
Utilizing versus.
<unk> vision.
Sure. So as you just touched upon another just mentioned to those prior question given the challenges within the new issue market. Currently we acquired these loans, where we have also locked in a five year tenure financing arrangement.
Which will be on a non mark to market basis, achieving a similar advanced right that you would get via securitization. So we thought this was a better outcome to produce better returns for the company.
Okay.
Our structures like that something that could be.
More available in the near term at noon.
Newish remarkable necessarily look as attractive.
Yeah, I mean, I think again.
Again, given the challenges the new issue market is facing these structures.
Could become more commonplace and if and when the market returns on the securitization front.
We will sort of balance that out on the go go forward basis.
Okay got it.
The last thing could you provide.
Update on book value quarter today.
Sure I mean again, we've had this question the last two quarters and Eastside, we've sort of presented it it's been various vastly different by the time quarter has ended.
Since the end of the quarter rates have moved about 30 basis points parallel across the curve.
Spreads are marginally wider I would suspect book value to be down between 2% to 3% since since quarterback.
Okay perfect. Thank you.
Thank you.
Again, ladies and gentlemen that star one to ask a question on the phone and our next question comes from both George from K B W. Go ahead.
Hey, guys. This is actually my <unk>.
My first question is can you provide an update on your asset acquisition pipeline kind of the overall level of competition in the space you know I'm wondering if any of your loan origination partners have stepped away kind of given the uptick in volatility and then as a follow up can you just remind us how many loan region origination partners you have and then you know if any are shutting.
Doors for or facing solvency issues, just kind of given the move in rates.
Sure Mike.
As far as sourcing assets, that's not a problem I think as we've sort of highlighted we've been defensive kind of maintain low leverage while adding accretive assets.
Since the start of the year, we required 1.6 billion of loans.
And obviously, we have also done five securitization to fund a lot of those transactions.
We are going to bid loans to where the securitization exited and or where we can find other long term sources of financing for those loans.
We don't have a flow agreement with anybody we buy.
<unk> what makes the most economic sense from an <unk> perspective for the company. So again, we have no commitments with any particular originators in terms of sort of thing.
On a flow basis any assets.
We have.
Everybody at are reckoned call to sort of pick and choose a collateral that we like.
Hopefully that answers your question.
Yeah. That's helpful. Thank you and then maybe just one more can you talk a little bit about where Levered rose R. On new investments and then kind of.
How are you thinking about the balancing act between going on offense buying back stock and maintaining a strong liquidity position.
Sure. So let me start with the row.
Question and as we mentioned on the loans that are looking to settle here in queue for the $476 million, we mentioned double digit returns on that investment.
I think the vast majority of the mortgage ecosystem can produce pretty attractive lower returns, but given the backdrop of higher rates.
Still competing inflation and fed being active we are going to maintain a pretty disciplined approach to deploying capital I think maintaining liquidity is the biggest focus here as we have done throughout the year, we started the year with one point.
<unk> turns a recourse leverage where at 1.1 now and rates have moved to the tune of three to 400 basis points across the curve.
But at the same time, we wanted to be just as in deploying a period of capital given how attractive some investments look.
But on the aggregate.
<unk> return it should be in the mid teens at least for us to sort of deployed capital and we see plenty of opportunities there.
As it stands now.
Great. Thanks, a lot for taking my questions.
Thank you.
And there appears to be no further questions at this time I would now like to turn it over to management for any closing remarks.
Thank you operator, and thank you everyone for joining us on our call today, we look forward to speaking to you of next year.
Thank you that does conclude today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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