Q4 2022 Chimera Investment Corp Earnings Call
Greetings and welcome to the Chimera Investment Corporation fourth quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Victor Falvo <unk> head of capital markets. Thank you. Please go ahead.
Thank you operator, and thank you everyone for participating in <unk> fourth quarter and full year 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 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 that 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 Philip Cordis.
Good morning, and welcome to Chimera investment Corporation's fourth quarter and full year 2022 earnings call.
Joining me on the call are Chard re <unk>.
Our president and Chief investment Officer.
Dan <unk>, our co Chief investment Officer.
After my remarks, Subra will review the financial results and then we will open the call for questions.
Let me begin by briefly introducing myself.
As many of you may know from our internalization in 2015 until I became CEO in December 2022, I served as the company's Chief legal officer and corporate Secretary.
Prior to that I was a partner at a major law firm and among other things was the company's outside counsel from its IPO until I joined as Chief legal officer.
What you may not know is that I have a broad range of experience before I became a partner in a law firm from.
From serving on Capitol Hill, and the executive branch to a defense analysts at a think tank to a fortune 50 company to being a doctoral student and economics.
My career as a lawyer was primarily structuring very complex financial transactions that.
That structuring experienced carried over into my work at the company, where I have been heavily involved in all aspects of the company's business, including serving on the investment and valuation committees as well as being involved in structuring its transactions.
And not a regulatory attorney.
Not a litigation attorney.
By appointment as CEO is not the result of any regulatory or litigation issue at the company.
But rather driven by my transactional and strategic experience.
Also letting.
Let me note that while I have the transactional and strategic experience I am not the chief investment officer.
We view the return to our past where the roles of CEO and CIO were separate.
Critical to our success.
Separating these roles will enable us to better focus on our long term vision, while staying staying keenly focused on investment opportunities and our portfolio.
Now before turning to our vision, let me hit the highlights of the fourth quarter end of the year.
As you know 2022 was challenging for us, especially during the last four months.
Headline inflation peaked around nine 1% and the fed raised its benchmark rate from near zero to a range of four point to five to four 5% by year end.
As a student of economic history, and being old enough to have lived through the late 19, seventies and 19 eighties, the fed falling behind inflation and rushing to catch up had a familiar rank.
I remember when my wife, and I purchased our first home in the late 19 eighties.
We're happy with the rate around nine 5%, because we had taken out an even more expensive second just to qualify for the first.
We understood the value of that home as an asset.
Not only was the story familiar but the impact on the company was expected.
We saw our weighted average recourse borrowing cost increased to about six 6% by year end compared to about two 3% for the prior year.
We saw earnings available for distribution declined to $1 eight for the year and to <unk> 11 for the fourth quarter due primarily to a onetime hit for severance for our former CEO and a 250 million fixed rate non mark to market financing, we entered into two enhance our.
Liquidity, while protecting us from the impact of increasing interest rates on those assets.
Excluding those two events are for the quarter would have been approximately 20.
During the latter half of the year, we entered several long term non mark to market facilities.
We looked into the future and we believe the statements by the fed that they were going higher for longer and decided to take the prudent action of extending some of our financing into 2024 and beyond.
To a point, where we felt more comfortable that the fed would be done raising and would begin cutting.
Such financing is of course more expensive than short term financing.
But it reduces our need for hedges to protect against margin calls, which frees up cash for other purposes.
Also we know that we are building up significant equity in our Securitizations as my wife, and I were with our first home.
And protecting our retained subordinate bonds with such financing is in the long term best interest of our shareholders even at the expense of higher rates.
But there were many positives during the fourth quarter. In addition to lengthen the term of our financings, we acquired approximately $463 million of prime jumbo loans into our long term financing facility, which is effectively fixed rate and non mark to market.
We believe the returns on this investment are accretive to our shareholders.
We were able to reduce our mortgage loan mark to market exposure by approximately 100 million by sponsoring the SM 2022, and our one securitization.
Also our book value per common share increased to $7 49.
At the end of the fourth quarter.
The good news continued during January as we were able to access the securitization market and terminated four of our securitization and issued two new securitization, reducing recourse borrowings by approximately $139 million.
And releasing approximately $90 million in equity.
We also committed to purchase approximately $700 million of re performing loans, which we intend to intend to settle into Securitizations and believe the returns on these investments are accretive to our shareholders.
We were also able to purchase additional business purpose loans and into January with $365 million in cash.
Finally, so far in February we have committed to purchase approximately $200 million of non QM loans, which again, we believe will be accretive to our shareholders.
So where do we go from here.
Our mission is simple to deliver attractive risk adjusted returns to our shareholders by being the best in class credit mortgage REIT.
We believe our assets are very strong.
We still have approximately $900 million of legacy non agency <unk> on our balance sheet that continues to.
Generate double digit yields for our portfolio.
As of year end, we had approximately $11 4 billion fair value of mortgage loans, including Rps held for investment.
These loan serve as the cornerstone of our business.
The largest component of our loan portfolio is re performing loans.
These loans are very seasoned and since purchase have demonstrated consistent to improving metrics regarding both credit performance and prepayment histories.
We have successfully securitized and re securitize these loans throughout the years.
Over time, these securitization to Delever and have historically provided opportunities for chimera to release equity <unk>.
Primary uses this equity for either redeployment into new assets.
<unk> of debt, our distributions to shareholders through dividends.
We view this ability to extract equity from our investments is a key differentiator for chimera amongst its peers and can be a significant source of capital for deployment.
We continue to see interesting and accretive opportunities at rpms, non QM bpl's and jumbo prime mortgages.
While our focus.
During the past few years has been our Rps, we expect to continue to diversify our loan purchases.
In addition, we historically have had robust portfolios of agency, our MBS and agency MBS.
We intend to rebuild these portfolios over time, both for their returns and for the liquidity to support our credit portfolio.
Since <unk> can't retain earnings we often find ourselves able to raise equity during periods, where the returns on credit assets are not attractive like.
Likewise, when the opportunities in credit are attractive as they are now it can be challenging to raise capital.
We see these agency portfolios as a way for us to balance out. These periods, we can grow our agency portfolios and use the increased liquidity to purchase credit assets when attractive or to support our financing of our credit assets during more challenged markets.
While these portfolios will support our core business, we will manage these portfolios with the appropriate leverage and hedging to generate current income and to maintain book value to support both our dividend and our investment in credit assets.
This is not a new strategy for us we successfully used it from internalization until the pandemic during that period, our combined our agency RMB and see MBS portfolio ranged from a low of about $4 billion to a high of slightly more than $12 billion billion, depending on the opportunity.
These two invest in credit assets.
Now, we do think 2023 presents challenges.
A lot of positives in January and believe there are still positive trends. Nevertheless, we also see some dark clouds.
Getting inflation down to 2%.
If possible is going to take some time.
According to a recent Wall Street Journal article the service industries.
<unk> care hospitality, and so forth account for 36% of all private sector payrolls bye.
By the same token the tech heavy information sector accounts for only 2%.
These service industries have accounted for approximately 63% of all private sector job gains over the past six months and the labor demand in these industries remains strong.
Accordingly.
We believe the fed when it says rates will go higher for longer.
And we believe we have positioned ourselves to handle that outcome.
We're also mindful of the second cloud liquidity volatility arising from debt ceiling shenanigans.
We're keeping our eye on our financing and roll dates with respect to this cloud.
Finally, there is the known unknown of geopolitical turmoil, Russia, China, Iran, and North Korea in particular, the impact of such turmoil is unknown.
But between our long term financing hedging and cash positions. We believe we are positioned to handle a variety of stress scenarios. Despite.
Despite these clouds I am optimistic about our future we have a great team outstanding assets and a clear vision.
I would now like to turn to Subra to give a more detailed overview of our financial results.
Thank you Phil.
I will review <unk> financial highlights for the fourth quarter and full year 2022.
GAAP book value at the end of the fourth quarter was $7 49 per share and our economic return on GAAP book value was three 8% based on the quarterly change in book value and the fourth quarter dividend per common share.
Our economic return for the full year was negative 27, 3%.
GAAP net income for the fourth quarter was 79 million or <unk> 34 per share and.
And GAAP net loss for the full year was $587 million or $2 51 per share.
On an earnings available for distribution basis net income in the fourth quarter of approximately <unk>.
<unk> per diluted common share and <unk> 16 per diluted common share after excluding a one time severance expenses related to the separation of our former CEO .
And for the full year earnings available for distribution was $256 million or $1 <unk> per share.
Our economic net interest income for the fourth quarter was $77 million and $436 million for the full year.
For the fourth quarter the yield on average interest, earning assets was five 5% our average cost of funds was three 9% and our net interest spread was one 6%.
Total leverage for the fourth quarter was four times to one while recourse leverage at the end of the quarter was $1 three to one.
For the year, our economic net interest return on equity was 14, 7% and our GAAP return on average equity was negative $16, 7%.
And lastly, our full year 2022 expenses, excluding servicing fees and transaction expenses were $72 million modestly up from the previous year that.
That concludes our remarks, we will now open the call for questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Once again Thats Star one to register a question at this time.
The first question is coming from Bose George of <unk>. Please go ahead.
Hey, guys. This is actually makes sense on for Bose.
And you intend to rebuild the agency MBS and <unk> MBS portfolios, just wondering how big do you envision this kind of getting as a percentage of capital and then what's the timeline for getting there.
Hi, This is Phil thanks for the question.
There isn't a specific timeline will look at the opportunities in the market for both <unk> and <unk>.
Depending on kind of relative value will start moving in to those assets as to the size I think what we'll be looking at as well.
Minimum up which we think is a.
Minimum size of the portfolio to be effective in this space or to be efficient, but the actual size will depend on kind of the size of our credit portfolio.
And where we see the future going in terms of possible investments. So we're not going to peg it to 10% or 25%, we're going to look at it more holistically at the time.
Great. Thanks, and then on the loan purchases.
Just wondering if you're able to purchase the loans and securitize. It roughly at the same time to kind of avoid the risk of holding those loans on balance sheet and funding it with repo.
That's correct that is our intent.
It could be the case that we because of timing that we ended up warehousing them for a week or so but the intent of when we purchased these is to settle right into securitizations.
Great and then maybe just one more.
Is that the purchases be accretive can.
Can you just kind of walk through what's the expected ROE and kind of what does this assume in terms of structural leverage and does it assume any repo leverage on the retain pieces.
Yes, we think it's we're talking about something in the mid teens for returns and that would include leverage on the retained pieces.
Great. Thanks, a lot for taking my questions you bet.
Thank you. The next question is coming from Trevor Cranston of JMP Securities. Please go ahead.
Hey, Thanks, good morning.
You guys talked about.
Broadening out flexible loan purchases youre going to be making.
Or so beyond the traditional <unk> as we go forward.
Between those the new categories of non QM and BPL for example.
Where do you see a bigger opportunity in terms of.
The supply of loans is available.
Returns that you think you can get on those investments. Thanks.
Well first of all that we really like <unk>. We think the returns are very good and we like the short duration.
At times, it can be challenging to acquire that in size, but we're always looking for opportunities there.
And so but in the non QM, it's something that we traditionally haven't played in but in terms of some forms of investor loans and the like in that category. We're now find to be attractive and opportunities are coming our way and were.
We think we'll be buying more of that on a go forward basis.
Okay got it.
And then the <unk>.
On the dividend.
So fourth quarter earnings.
Excluding the one time stuff.
Two it's still trended.
Downwards as cost of funds has increased.
Can you maybe just talk about how you guys are thinking about the dividend given that trend.
Maybe any other considerations.
The board takes into account.
Metric when you go to the setting the dividend thanks.
Sure. Thanks.
<unk> is one of the metrics, it's not the only metric and at times. It is.
It's a good measure for certain aspects, but not.
100% foolproof, so I think the board looks at a variety of.
Factors, including kind of the total cash that the portfolio is generating.
Some of which just is not captured in kind of the metric. We also bear in mind as I mentioned that we have equity in our securitization and so depending on the timing and what our needs are.
We may tap that from time to time, so we have.
All of those factors go into it when we think about where in the board thinks about the dividend and so they were given where the portfolio is they were comfortable with declaring the the first quarter dividend at 23, despite kind of where it is at the present moment.
Okay I appreciate the comments. Thank you sure no problem.
Once again, ladies and gentlemen that is star one if you would like to register a question at this time.
The next question is coming from Lee Cooperman of Omega family Office. Please go ahead, yes. Thank you very much.
I was just making the observation you said, you're a student of history.
Any sort of issue with no interest rates were going up why were you not hedged earlier than now.
That is something that.
In hindsight the company should have done I mean that we're right now looking kind of on a go forward basis. I mean, we have had a change in leadership, we do have a vision of where we're going we do have some.
Structure in our strategy with respect to hedging versus.
Our longer term financing and so.
That's where we are I am a student of history, but to be Frank.
As in our past and one that we're focusing on is fixing it and moving forward.
So it was a question that was previously asked but.
You talked around it.
Where you want to run the company what is it reasonable return on equity for us to generate $7 49 tends to book value.
Okay.
It's really our it's really our dividend returned 10 <unk>.
12% ish range.
So let me sort of an equity wouldn't do it 10% return on equity would be 70 question dividend.
But.
Okay.
Got it.
Jump into.
Kelly this is sabra.
Historically the dividend yields are.
<unk> has been around 10% to 12% and that's where we expect.
Our dividend too.
Investments are.
Currently yielding and Thats, where we see the dividends to be.
Is the return on capital is to be expected from the start so what are you, saying the return.
Return on equity determines the distributable income, which will determine the dividend so you're saying that the return on equity should be 10% to 12%.
Yeah.
Yeah great.
Alright, okay.
That would imply the dividend is kind of.
Iffy at this level that should we assume issue holders that there's a good chance the dividend might be reduced in the next 12 months, what do you think that it is likely.
And.
No.
I think right now, we feel with where the dividend where our portfolio is in terms of.
Throwing off cash and a new investments we're making.
It's hard to predict where the future is in terms of the markets and potential dark clouds that we talked about.
Right now we feel good about that 23% dividend.
Thank you.
And I assume given the balance sheet, you have plenty of capital to run the business you don't need additional capital.
Yes.
Yes, we have plenty of capital to run the business as it's currently constructed but but as we mentioned in terms of growing the other portfolios and investment opportunities.
The straight we're not going to shy away from raising money.
That money is raised at a rate that's appropriate for us to reinvest in the assets. So if we see a positive return.
To that capital, we will wont shy away from raising additional funds.
Equity would you consider equity financing at these levels.
I would consider equity financing depending on.
The investment opportunities to the time that we could access the market. Yes. So you you would show stock at a discount to book value.
I didn't say that I said that we will manage capital I'm asking I'm asking.
Let me tell you what my view is wall Street has created a lot of companies in this BDC MLP space.
Space. They only work when your stocks are at a premium to AAV because what happens is you.
So stock you buy assets you raise your dividend you show stock you buy assets you raise your dividend when you go to a discount to any of these game over.
Only the smart Guy is it basically either merge to become more efficient to generate synergies or basically buy back stock at a discount.
Idea of selling stock at a discount to book value makes absolutely no sense, we should consider winding up the affairs of the company and giving back the money to shareholders. Instead, we made a mistake.
He has been a disaster.
Yes.
I don't disagree with that and our intent would be to raise at book I mean, the reason I pause for a second it depends in terms of what the opportunity is and if we feel that that is massively accretive we would at least consider it but that's not our going in position.
Okay.
Good. Thank you good luck.
Thank you.
Thank you at this time I would like to turn the floor back over to Mr. Curtis for closing comments.
I'd like to thank everybody for joining our earnings call and frankly, my first earnings call.
Been a pleasure.
To have the opportunity to speak to you and I look forward to doing so.
In the future. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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