Chimera Investment Corporation Q1 2023 Earnings Call
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Good day, ladies and gentlemen, and welcome to the Chimera Investment Corporation first quarter 2023 earnings call.
All lines have been placed on a listen only mode and the floor will be opened for your questions and comments following the presentation.
Would require assistance throughout the 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.
The floor is yours.
Thank you operator.
Thank you everyone for participating in <unk> first quarter 2023 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.
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.
Joining the call today, we may also discuss non-GAAP financial measures.
Please refer to our SEC filings and Investor presentation for reconciliation.
The most comparable GAAP measures.
Additionally, the content of this conference call maybe contain time sensitive information 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 Chief Executive Officer, Phil Cordis.
Thanks Vic.
And welcome to Chimera investment Corporation's first quarter 2023 earnings call.
Joining me on the call are Chaudhry Youre, all legato, our president and co Chief investment Officer.
Dan <unk>, our co Chief investment Officer.
Subra Viswanathan, our Chief Financial Officer, and Vic Falvo <unk> head of capital markets.
After my remarks, Subra will review the financial results and then we'll open the call for questions.
The first quarter it took us on quite a ride.
Some would say like a rollercoaster I would say it was more like the slingshot ride at Coney Island.
Despite the volatility we accomplished quite a lot.
Committed to purchase 1.25 billion, a diversified mortgage loans completed three securitizations reduced recourse leverage by $237 million and generated at 2% total economic return.
And since the quarter ended we have completed four securitizations, including a securitization we expect to close later today.
And reduced our recourse leverage by a further $400 million, including reducing our re performing loan warehouse exposure to zero.
All in a very challenging environment.
Let's do a quick review of what happened during the quarter.
The quarter started with the market expecting a recession by midyear based on December economic data.
We saw rates moderate our book value increase in the securitization market begin to open up the.
<unk> responded as expected on February one by slowing the pace of rate hikes to 25 basis points.
And then on February 3rd we were whipped in the opposite direction. When the January employment report showing extraordinary job growth coupled with upward revisions to last year as jobs data.
The news continued in the same direction with increased consumer spending and both headline and core inflation increasing in January .
In response to this data Chairman Powell statement before Congress on March 7th was quite hawkish, raising the possibility that the fed will revert to larger rate hikes and at the peak peak rate and the cycle would be higher than previously thought.
Soon after his testimony that July fed funds futures contract yield increased to 559% and the market expected that rates remain throughout the year.
Then two days later it was clear our Silicon Valley Bank was in deep trouble and the next day. It was put into receivership by the FDIC and signature bank failed over the weekend.
The future of credit Suisse was also overhanging the market.
This set off a period of significant volatility in the rates market. The immediate concern was that the other regional banks would fail or would need government assistance.
The markets responded over the next 10 days with the July fed funds contract rallying by 110 basis points.
Market expectation shifted to easing by the fed in July and the expected fed funds rate dipped to below 4% by year end.
With both the FDIC and the fed providing liquidity facilities for the banks things began to calm.
Data released in March so the labor market remains strong and inflation remained high.
The fed responded with the business as usual rate hike of 25 basis points.
And new Dot.
<unk>, so that a majority of the fed officials still expected to peak funds rate to be five and 10, 8%.
The market on the other hand continue to disagree and had to price had priced in rate cuts later in the year.
Yesterday, the fed raise rates again by 25 basis points and changed the language the hint that a pause at the next meeting is possible, but also said that their inflation projections did not support a rate cut this year.
Higher for longer.
The slingshot changes we experienced during the quarter created some unforeseen challenges the heightened rate of volatility and spread widening that occurred impacted the timing and the execution of the securitization of the loans, we committed to purchase early in the quarter.
The extreme rate volatility also had a negative impact on our longer dated hedge instruments, resulting in approximately $34 million of realized losses on derivatives for the period.
The net result of this volatility is that while our while the value of our assets increased during the quarter, our book value per share decreased by only eight or about 1%.
That change in book value plus to 23 cent dividend paid in the first quarter resulted in a 2% total economic return for the period.
We believe this demonstrates the strength and resiliency of our loan portfolio.
Now, let me take you through our business activities for the quarter.
January Chimera issued its call rights are exercised his call rights and terminated for existing securitization.
Then issued a 586 million same trust 2023 or one.
And $137 million same trust 2023, and our one.
This re securitization enabled us to shift our $150 million from recourse borrowings into securitized debt.
While receiving about $90 million in cash.
Our average cost of debt on the re securitization was 666%.
Both securitization are callable within two years.
It gives us the ability to refinance the secure refinance the securitized debt should interest rates improve in the future.
We engaged in these re levered transactions for several reasons, including our financing exposure to credit Suisse.
We began the quarter, we had $168 million of recourse financing with credit Suisse and we knew that they were exiting the business.
The re lever included bonds, we had previously financed with CFS and the net cash provided time and the opportunity for us to explore new credit facilities to replace CFS.
We were successful in our efforts, which enabled us to reinvest the proceeds from the <unk>.
Any other form of equity raise there is a lag effect on earnings until the new funds are fully deployed.
As discussed on our prior earnings call during the quarter, we had committed to purchase approximately one 5 billion of mortgages.
The total commitments of approximately 57% were seasoned re performing loans.
39% were nonqualified investor mortgage loans, and the remainder were business purpose loans.
With the exception of the business purpose loans, all loans were purchased with the intention to finance.
Over the long term through securitization.
The loan characteristics of the seasoned <unk> and <unk> were consistent with the characteristics, which currently exist in our portfolio.
In March we sponsored Sam at 2023, or two a rated securitization of seasoned re performing residential mortgage loans, having a principal balance of $447 million.
Securities issued in 2023 or two with an aggregate balance of approximately $365 million were sold in private placement to institutional investors.
Senior Securities represented approximately 82% of the capital structure.
We read we retained the subordinate interest and certain interest only securities with an aggregate balance of approximately $83 million for investment.
Our average cost of debt on this securitization is 595%.
We retained an option to call. This a securitized mortgage loans at anytime beginning in March.
2028.
We continued our securitization activities post quarter in April we respond third Sem Trust 2023, I won a rated securitization of non QM investor mortgage loans, having a principal balance of $236 million.
We also exercised call rights and terminated two existing securitization trusts and then issued a 451 million Sim Trust 2023, or three and a $67 million same trust 2023 and are too.
These.
This re securitization enabled us to shift approximately $150 million from recourse borrowing to securitize debt, while receiving about $40 million in cash.
Finally, we priced Sam Trust 2023, or four a rated securitization of season to re performing residential mortgage loans and we expect that transaction will close later today.
The mortgage loans included loans, we committed to purchase in January as well as our Pls, we had on warehouse and upon closing of the transaction, our RPM warehouse exposure will be reduced to zero.
We currently expect to close the remaining non QM investor loans into a securitization during the second quarter.
Despite the market turbulence this quarter, we remain optimistic about our future.
We believe our continued ability to execute on loan purchases and Securitizations highlights the overall strength of chimeras franchise value.
Our seasoned re performing loan portfolio continues to perform well from a credit perspective.
Our recent AAD challenges are primarily related to our cost of financing not the credit quality of our portfolio and not the income generated by the portfolio, which is down marginally over the past year.
We note that once rates moderate and began their decline our portfolio is well positioned to benefit.
We expect our repo financing will decrease when rates fall, resulting in a steadily increasing NIM overtime.
Currently we have 14 securitization that are callable this year.
The timing on calling these securitizations depends on a number of factors, including the amount of equity to be extracted new investment opportunities available the cost of new senior securitized debt.
And the overall impact on our balance sheet and income statements.
We continue to view this ability to extract equity from our investment as a key differentiator for chimera amongst its peers and can be a significant source of capital for redeployment.
Yes.
We believe our assets are very strong and the company is well positioned when rates begin to moderate.
Continue to see interesting and accretive opportunities in prime jumbo loans, Rps non QM btls as well as agency MBS.
While our focus for the past few years has been on Rps, we expect to continue to diversify our investments over time.
We understand the road ahead is not smooth.
New investment opportunities look attractive and we remain optimistic about our future we.
We have a great team outstanding assets and a clear vision.
I would now like to turn to Subra to give any more detailed overview of our financial results.
Phil I will review <unk> financial highlights for the first quarter of 2023.
GAAP book value at the end of first quarter was $7 41 per share and our economic return on GAAP book value was 2% based on quarterly change in book value and the first quarter dividend per common share.
GAAP net income for the first quarter was $39 million or <unk> 17 per share.
On an earnings available for distribution basis net income in the first quarter of approximately $31 million or <unk> 13 per diluted common share.
Our economic net interest income for the first quarter was $69 million.
For the first quarter the yield on average interest, earning assets was five 5%.
Our average cost of funds was four 1% and our net interest spread was one 4%.
Total leverage for the first quarter was $4 one to one while recourse leverage ended the quarter at one two to one.
For financing and liquidity the company had $660 million total cash on unencumbered assets at quarter end.
We had $1 6 billion of either non are limited mark to market features on our outstanding repo agreements.
We had $2 5 billion floating rate exposure on our outstanding repo liabilities, we had 1 billion pay fixed interest rate swap at a rate of 326% as our hedge position for our liabilities and we had 1 billion swaption to pay fixed for one year beginning in March 2024 at <unk>.
The average rate of 346% as our hedge position for liabilities.
The company also had $450 million outstanding short futures contracts to hedge loans or future securitizations.
For the quarter, our economic net interest income return on equity was 10, 5%.
And our GAAP return on average equity was eight 6% and lastly, our first quarter 2023 expenses, excluding servicing fees and transaction expenses were $16 million modestly lower from the same quarter in the prior year that concludes our remarks, we will now open the call for questions.
Yes.
Okay.
Operator, we're ready for questions.
I apologize for that.
Thank you if you have a question or comment please press star one on your telephone keypad at this time.
Tim Your question has been answered you can remove yourself from the queue by pressing one.
Again, ladies and gentlemen, if you have a question or comment. Please press star one on your telephone keypad at this time.
Please hold while we poll for questions.
And our first question comes from.
Doug Harter of credit Suisse. Please go ahead.
Thanks.
We'll bring you could.
Talk about how youre thinking about that.
The dividend given.
Yes kind of current earnings.
And your outlook for earnings.
Kind of all of the freed up capital is redeployed.
Doug This is Phil.
Yeah, we recognize that our current dividend exceeds our AAD.
But as we said earlier, we believe our portfolio is strong and it's positively positioned when rates begin to decline.
We also believe that we will see it accretive investments come to the market, but on the other hand, we note that rate volatility and the subsequent dislocations in the banking sector, possibly a banking crisis is creating a great deal of uncertainty around the future and so while we remain positive we're going to be keeping our.
Eyes on these kind of development.
Got it.
Given that it.
Kind of uncertain as to when rates.
Decline.
She says versus proposed sharp.
How are you thinking about.
How how long or how far into the future kind of bolt on.
On kind of the earnings power versus.
<unk>.
Yes, maybe preserving some of that capital for investment opportunities.
Yes, I think you actually hit exactly how we're thinking about it.
And with the portfolio is still stays strong our topline revenues still sterling staying strong.
Our financing costs are obviously, what's hurting and we know we will be looking at.
How long that lasts what are.
Actual investment opportunities are and where the market is and will be constantly juggling those things to.
To come to a view as you said right now there's a fair amount of uncertainty and so.
We will be looking at all of that and come to the right balance, which we think will be in the best interest of shareholders.
Okay. Thank you.
Our next question is from Chris.
JMP Securities. Please go ahead.
Yes.
Alright. Thanks.
Could you talk a little bit about.
Potential opportunities youre seeing coming out of.
Bank portfolios.
On the whole loan side.
And how much.
Free capital you feel you have.
Available to potentially take advantage of any opportunities like that or if you might be willing to incur.
Increased leverage in the nearer term significant opportunity comes to market.
I'll start with that and just say look we as we mentioned we have 14 securitizations that are callable and we will look at the facts and circumstances and some of them are investment opportunities, we could look at at leverage.
Other sources of capital as to the kinds of things that we're seeing and we think I'm going to turn this over to Dan <unk>, Our co chief investment all Yeah, Hi, This is Dan <unk>.
Sorry, if your question is regarding this FDIC liquidations.
The majority of that's in the agency MBS.
At this point the stance that we've taken is even though spreads are pretty wide. We think given the negative technicals on the agency RMB S market, we think.
Spreads can stay here and don't see an imminent catalyst for tightening so I feel it's at right now what we are trying to do is deploy the capital to the extent they become available and non QM as well as our bill.
Does that answer your question.
Yeah that's helpful. Thanks.
And then on the.
Warehouse financing side can you guys just give us some general market color in terms of.
<unk> seen any changes or impact to the warehouse market.
In light of.
The banking issues and volatility that we've seen over the last couple of months.
We have not.
We have not seen any impact as of currently.
Okay.
Our next question is from Bose George of key VW. Please go ahead.
Okay.
Hey, guys just one from me.
Do you have an update post book value quarter to date.
We think it's relatively unchanged.
Okay, Great that's helpful. Thanks.
Our next question is from Eric Hagen BT ISG. Please go ahead.
Yes.
Good morning, you've got Ethan on for Eric just a couple from me and I joined a couple of minutes late so apologies if you already answered this but.
Is there a market yield you would estimate for the loan portfolio and how does that compare to the yield on your cost basis.
Hello.
The yield that on a cost basis, we have in our sorry. This is for growth.
The yield we have is the overall portfolio we have is five 5%.
And then most of it obviously is the loan that's on the cost basis.
On the market yield I mean, it's just really maybe downward so that he can talk about the market yields.
It depends on the asset class.
Between IPL and <unk>.
Non coming this alone.
That's all for me.
Alright, thank you.
No further questions at this time.
Alright. This is still card is thank you for joining us on this 20 twenty-three first quarter earnings call and we look forward to speaking to you later this year.
Okay. Thank you. This concludes today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
Mmm.
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