Q2 2023 Chimera Investment Corporation Earnings Call

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Good day, ladies and gentlemen, and welcome to the Chimera investment second quarter 2023 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.

Operator.

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> second quarter 2023 earnings conference call.

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

During this call we were 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.

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 Investor presentation 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 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.

Thank you Victor.

Morning, and welcome to the Chimera investment Corporation's second quarter 2023 earnings call.

Joining me on the call are Chard re <unk>, our president and co Chief investment Officer.

Dan Tucker, our co Chief investment Officer.

Subaru this one often our chief financial officer, and picks algo, our head of capital markets.

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

We continue to be active during the second quarter through securitization stock repurchase and liability management.

We completed five securitizations during the second quarter totaling nearly $1 4 billion.

Let me describe our quarterly securitization activity at a high level.

In April we sponsored 2023 I want.

A rated securitization of non QM investor loans totaling approximately $236 million.

Approximately 87% of the capital structure was sold in a private placement to institutional investors.

We retained the subordinate interest in securities with an aggregate principal balance of approximately $31 million.

And certain interest only securities.

Our average cost of debt of this securitization is six 6%.

We retain an option to call the securitized mortgage loans anytime beginning in April of 2026.

In May we sponsored 2023 or four.

A rated securitization of seasoned re performing residential mortgage loans totaling $394 million.

We sold approximately 75% of the capital structure and a private placement to institutional investors.

Chimera retained subordinate interest in securities with an aggregate principal balance of approximately $97 million.

And certain interest only securities.

Our average cost of debt of this securitization is five 4%.

We retained an option to call the securitized mortgage loans at anytime beginning in April of 2028.

In June we sponsored.

Sam at 2023 I too.

Our second rated securitization of non QM investor loans, this year totaling approximately $239 million.

Approximately 85% of the capital structure was sold in a private placement to institutional investors.

We retained interest in securities with an aggregate principal balance of approximately $36 million and certain interest only securities.

Our average cost of debt of this securitization of 7%.

We retained an option to call the securitized mortgage loan to anytime beginning in July 2026.

We expect double digit returns on the retained securities for these three securitizations.

And now regarding re securitization, we terminated two existing trusts Sim 20 set two.

<unk> 2017 dash seven.

Excuse me.

CML Ti 2019 dash.

In addition to the loans from these two deals.

<unk> added approximately 104 million loans from our warehouse facility.

<unk> issued <unk> trust 2023 or three.

And Sam Trust 2023 and are too.

These re securitization allowed us to.

One avoid a step up.

Increase on the senior debt of one of these terminated trust too.

To convert short term repo funding into long term non recourse fixed rate financing.

And three to recapture approximately $43 million in cash from the terminated trusts.

Primarily as a result of our securitization activity this quarter, we reduced our recourse financing.

Primarily loan warehouse facilities by more than $500 million.

And in total through the first half of the year, we reduced our recourse financing by approximately $750 million.

Short term rates continued to increase this quarter, we prepared for higher for longer rate environment.

We added an additional $500 million one by one swaption, bringing our total swaption position to one 5 billion with an average pay fixed interest rate of 356%.

These swaps since gives us give us optionality to hedge our NIM if rates remain elevated through 2024 and into mid 2025.

In addition, our board reauthorized, our stock buyback plan and increased it to $250 million in the middle of June .

Thereafter, we were able to repurchase more than $5 8 million shares for approximately $33 million at an average price of $5 66.

The share repurchase was accretive to our shareholders.

Okay.

Our book value per share decreased by 12, or one 6% quarter over quarter.

The net change in book value plus dividends paid on our common shares resulted in an 80 basis point total economic return for the quarter and a two 8%.

Total economic return for the first half of 2023.

Looking ahead, while we believe it is likely the fed will raise rates one more time. This year, we believe the rate hike cycle is nearing an end.

Inflation is coming down slowly while the economy and job market remained strong.

Ads on staff no longer predicts a recession in 2023.

And the fed may well engineered a soft landing.

We're also buoyed by the residential by residential credit, which performed strongly during the quarter as well as by the strength of the housing market to spike.

In spite of affordability issues.

So what does that mean for us as we discussed in the past our portfolio continues to perform well our challenges are primarily related to our cost of financing not the credit quality of our portfolio.

Once rates moderate and began their decline our portfolio is positioned to benefit.

We would expect that this rate moderation and stability will allow us to refinance some of our more expensive financings, which will be positive to our earnings.

On the other hand to the extent that rates stay elevated for longer we have $1 5 billion in swaption, which we can exercise that support our interest margins into 2025.

We continue to see interesting investment opportunities and we think with the proposed bank capital regulations that additional investment opportunities will arise over the second half of 2023.

We will continue to evaluate those opportunities along with our stock price relative to our book value with respect to continued stock repurchases.

We have a number of tools in our toolkit from reducing our financing costs to repurchasing our stock to making accretive investments investments to drive shareholder value.

We remain optimistic about our future.

I would now like to turn to <unk> to give a more detailed overview of our financial results.

Thank you Phil I will review <unk> financial highlights for the second quarter of 2023.

GAAP book value at the end of second quarter was $7.29 per share and our economic return on GAAP book value was 80 basis points based on the quarterly change in book value and the second quarter dividend per common share.

And for first half of the year, our economic return was two 8%.

GAAP net income for the second quarter was $18 million or <unk> <unk> per share.

On an earnings available for distribution basis net income in the second quarter of approximately $28 million or 12 cents per diluted common share.

Our economic net interest income for the second quarter was $67 million.

The second quarter the yield on average interest, earning assets was five 6% our average cost of funds was four 4% and our net interest spread was one 2%.

Total leverage for the second quarter was $4 two to one while recourse leverage ended the quarter at 1.0 to one.

Our financing and liquidity.

Company had $670 million total cash and unencumbered assets at quarter end.

Had $1 5 billion of either non are limited mark to market features on our outstanding repo agreements.

We had 2 billion floating rate exposure on our outstanding repo liabilities.

Had $1 billion pay fixed interest rate swap at a rate of 226% as our hedge position for our liabilities.

And we had $1 5 billion swaption to pay fixed for one year beginning in the second quarter of 2024 at an average rate of 356% as our hedge position for liabilities.

For the quarter, our economic net interest income return on equity was 10, 2% and our GAAP return on average equity was five 5% and lastly, our second quarter 2023 expenses, excluding servicing fees and transaction expenses of about $14 million modestly lower from the first quarter.

That concludes our remarks, we will now open the call for questions.

We will now conduct a question and answer session.

If you have a question. Please press Star then the number one on your telephone keypad now.

Once again to ask a question. Please press Star then the number one on your telephone keypad.

Your first question comes from George Bose of K VW. Your line is open.

Hey, guys. This is bose.

Thank you had a couple of questions first on the expenses did come down this quarter can.

Can you just sort of talk about the outlook for expenses going forward.

We expect the expenses to remain constant obviously.

Some of the variable expense variable expenses, such as servicing fees and transaction expenses.

Would vary depending on you know.

If we increase the number of loans.

But as paid on happens some of these variable expenses will continue to go down, but otherwise our G&A expenses.

It to be pretty benign.

Pretty consistent as we have.

Okay, great. Thanks, and then just in terms of the current return. So you said that economic ROE I think it was 10, 2%.

How does that compare to the the incremental ROE that you are getting on loans, you're buying and securitizing currently.

So okay.

Okay. So I just want to make sure. So what we project right now the 10, 2%.

Our scenarios, we expect our topline.

Interest income to stay consistent with what we have.

Expenses really it depends on where the latest if we expect an additional 25 basis point increase in interest expense so that will.

Somewhat.

Offset some of that.

But.

What we focus right now is to have a consistent.

Economic return based on <unk>.

Net income.

Our our interest income being projecting to be consistent.

Across quarters.

And so when I take that number and sort of the expense the expenses run rate expenses as a percentage of equity.

For you guys to get to kind of a double digit ROE on a net basis does.

Does it require like either more scale or rates to come down or what kind of scenarios like how do you get from here to sort of that run rate double digit net Roe.

This is Phil.

That's correct I mean.

As we look for accretive investments, we will have to we need to increase.

And we will need some rates that come down as well.

Okay, great. Thank you.

Your next question comes from Doug Harter of Credit Suisse. Your line is open.

Thanks.

Okay.

The decision on the dividend and Alan.

It is kind of where earnings are and kind of the expectation.

Thank you.

Okay.

So yes, sorry, you broke up a little bit I think you were asking about the dividend.

Hello, Yes.

Yes, sorry, I think I cut out there for a second.

So.

Just sorry, just can.

Can you talk about.

The board's decision around the dividend in light of current earnings are on your expectations around kind of getting back to covering the new dividend.

Yes.

As we've said in the past the AAD as one of the metrics the board looks at it.

It's useful.

Guidance it isn't an exact in terms of what our dividend paying capacity is.

And we look at what that capacity as we look at kind of as we mentioned looking forward into the future as rates are moderating we believe we'll be able to do.

<unk> refinanced some of our more expensive financings, which will help us on our earnings and so we think there are opportunities to continue to grow into that by the same token.

Right now what were portfolios generating the board feels comfortable at pay.

Paying that dividend.

Great. Thank you.

Yeah.

Sure.

Once again to ask a question. Please press Star then the number one on your telephone keypad.

Your next question comes from Trevor Cranston with JMP. Your line is open.

Okay. Thanks, good morning.

Could you elaborate a little bit on that.

The type of opportunities that you think could emerge coverage out of the bank. So as a result of.

The capital requirement changes.

And what you think the.

Timing of opportunities emerging there could be over the second half of the year.

Sure I will turn this over to Dan who can address that yes. So.

So as you said there is a strong likelihood that mortgage banks will have to hold more capital against the residential mortgage pools.

First of all residential mortgage originations were non bank originators and result in more.

Private label securitization visa.

We will see those opportunities in the future as you said.

One thing I will say that even without that we are being shown large inventories of discounted underwater mortgages given.

Given the consolidation going on in the banking space.

At this point the opportunities that we are seeing is primarily in the.

Prime Jumbo.

Low LTV kind of paper.

Okay got it I appreciate that thank you.

At this time there are no further questions I'd like to turn the call back over to management for any closing remarks.

Hi, This is still Carlos Thank you for participating and Chimera investment Corporation's second quarter earnings call and we look forward to.

Discussing.

Our third quarter earnings call in November Thank you.

Okay.

Thank you everyone for attending the Chimera earnings call that does conclude today's call have a wonderful rest of your day.

Okay.

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