Q3 2023 Chimera Investment Corp Earnings Call
Greetings welcome to the kind of Maryland Investment Corporation third quarter of 2023 earnings call. At this time all participants are in a listen only mode of question and answer session will follow as a formal presentation.
Require operator assistance during the call. Please press start zero on your telephone keypad. As a reminder, this conference is being recorded at this time I would like to hand, the call over to Victor <unk> head of capital markets. Thank you you may be get.
Thank you operator, and thank you everyone for participating in <unk> third quarter 20 twenty-three 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 bench and results may differ materially from these forward looking statements.
We encourage you to read the forward looking statements disclaimer and our earnings release in addition to our poorly and an annual salary filings.
During the call today, we may also discuss non-GAAP financial measures.
Please refer to our SEC filings and earning supplement for reconciliation is the most comparable GAAP measures.
Definitely 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 call over to our Chief Executive Officer, Phil Carter.
Good morning, and welcome to the third quarter of 2023 earnings call for Prime Era Investment Corporation.
Joining me on the call or <unk> or all the Garda, our president Chief operating officer and co C. I O.
Sue breath. This one often our chief financial Officer, Dan Tucker Arco C I O and picks album or head of capital markets.
After my remarks Super will review the financial results and then we'll open the call for questions.
I like to start by welcoming to new members to the Chimera team. Susan Mills has been elected to our board of directors effective November 13th.
She recently joined Academy Securities, a Bachelor and one investment bank.
Before that she spent 36 years at Citibank, where she held various senior management positions in businesses related to North American residential mortgages.
She brings a wealth of expertise and experience in the residential mortgage market and we're very excited to have her as part of a team.
Also I own sung is joining US next week is our chief legal officer she.
She has over twenty-three years of legal experience, both as external council and in house.
She has spent the last seven plus years as senior Vice President cheap legal officer and Secretary at first that that all properties Inc.
New York Stock Exchange listed equity.
We're excited to have her joined the team.
During the third quarter that fixed income market experienced both increased volatility and higher rates.
In July as expected the federal reserve increased its fed funds target rate by 25 basis points.
And while the fed pause the rate hikes at the September meeting they did reduce the projected rate cuts in 2024 by half 450 basis points.
The resulting back up on the log ended the yield curve caused the 10 year Treasury right to increase 73 basis points over the course of the quarter.
4.57%.
The 10 year yield continued his climb after quarter and and briefly reached five per cent in mid October.
These higher interest rates are moderately reduce the value of our portfolio.
We saw a gap book value per share dropped quarter over quarter from $7.29 to $6.90 a.
A decrease of 5.4%.
Considering the market conditions, we remained cautious and mostly on the sidelines, which left our investment portfolio relatively unchanged during the quarter.
We did however continue to focus on liquidity and liability management.
This quarter, we added three new Repoed counterparties.
And post quarter, we we we financed a high fixed rate non mark to market facility into a new two year, a limited mark to market facility.
We expect this facility will save US approximately 16 million in interest expense over the next 12 months.
So what is our outlook.
[noise] ahead to the fourth quarter. It into 2024, we are planning for rates to remain high.
Inflation is moderated since last year it remains much higher than the feds two per cent target and although it appears the fat is nearing the end of its hiking cycle recent data appears to support another rate hike U S. Labor market remains strong third quarter G. D P increased to nearly 5% and.
And consumer spending increase more than expected in September.
In addition to the fed funds rate remaining elevated in 2024, we know what they're relatively quick escalation of long term rates driven by several factors, including the strength of the economy and the fed pushing out rate cuts.
Also the growth of the federal deficit and associate it interest cost.
Coupled with concerns about participation by China, and Japan and Treasury auctions.
And the fed effectively gate engaged in quantitative tightening.
Have created supply imbalances, which have helped push longterm excuse me supply and demand imbalances, which have helped push longterm rates higher and we believe for longer.
In fact, a sustained move in the 10 year treasury yields above five per cent cannot be ruled out.
[noise] home sales are on pace for the slowest years since the great financial crisis.
Elevated home prices constrained housing inventory and high mortgage rates.
Created a trifecta of headwinds perpetuating the housing affordability crisis.
Apart from the data driven volatility there's also rising risk of government shut down.
[noise] collation of the war in the Middle East that can further exasperate volatility in the capital markets.
So what's our strategy.
We continue to manage our business with the belief that interest rates, both short and long term will be higher for longer our focus remains on strengthening our balance sheet and managing our liabilities.
To help reduce various risks associated with recourse financing, we frequently seek longer data majorities obtain non or limited mark to market terms and utilize financial derivatives, such as swaps swaptions and futures contracts to soften the impact of rising rates.
Through these initiatives during the first nine months of 2023, we have reduced our recourse financing by more than $800 million.
We have nine or limited mark to market financing on 57 per cent of our outstanding recourse financing.
We have hedged 1 billion or roughly half of our floating rate financings with a weighted average swap rate of 3.26%.
And we have 1.5 billion in Swaptions, which give the company the option to pay a fixed rate of 3.56% for one year beginning in the second quarter of 2024.
Even in this higher rate environment or assets continue to perform well our interest income quarter over quarter and year over year is relatively unchanged.
Credit performance on our portfolio has been better than our original investment expectations.
Believe our portfolios unique.
Most of our securitization are backed by approximately 11 billion of Reperforming loans with low L. T B's and an average seasoning of 17 years, which we expect will continue to perform well over a range of economic conditions.
Our securitization continue to deliberate.
And depending on future interest rates, we won't be able to terminate and take out cash when appropriate.
In addition to focusing on liability management and liquidity, we intend to optimize our investment portfolio and we will seek opportunities to acquire assets that will improve our returns and liquidity.
Finally.
Prove our liquidity and better position ourselves for investment opportunities, we have reduced our dividend to a level consistent with what we expect to earn it through the end of next year.
We believe.
It is prudent in this macroeconomic environment and in the best interests of our shareholders over the long term to reset the dividend.
Today's market conditions are challenging, but we remain optimistic about our future our portfolio containers. Its strong performance both in income generation and credit or securitization continue to deliberate with 14 deals callable and 20 twenty-three another four become callable in 2024 and another six.
In 2025.
Believe that as our financing cause decrease.
We expect our economic performance will significantly improve.
We believe we're taking prudent steps, which will benefit chimeras shareholders over the long term.
And now I'll turn the call over to Subra to review our financial results.
Thank you Sir I will review come at Us financial highlights for the third quarter 2022.
Gab book value at the end of the third quarter was $6.90 per share and all that.
Great on gap book value was negative 2.9% based on the quarterly change in book value in the third quarter do it and put a common chip.
And for the nine months here today.
<unk> was zero percent based on the change in book value since CNN and the first three quarters dividends common sure.
GAAP net loss for the third quarter was $16.3 million or seven cents per share.
On an earnings available for distribution basis net income in the third quarter of approximately $29 million.13 per diluted common show.
Our economic net interest income for the third quarter was 66 million.
For the third quarter the yield on average interest owning assets was 5.8% on average cost of funds was four and a half per cent and are into spread was 1.3 per cent.
Total leverage for the third quarter was 4.1 to one while rico's leverage ended the quarter at one to one.
Or financing and liquidity the company had 606 million total cash and unencumbered assets at quarter then.
1.5 billion of either <unk> or limited multimarket features on our outstanding LIBOR arrangements.
We had 1.9 billion floating lead exposure on our outstanding legal liabilities.
We had 1 billion basics interest rate swap at a rate of 3.26% as a hedge position for our liabilities.
And we had 1.5 billion swaptions to pay fixed for one year beginning in the second quarter of 2024 at an average rate of 3.56% as a hedge position for labor leaders.
With a quarter of economic net interest income return on equity was 10.4% in a gap redone on average equity was born three per cent.
And lastly, our third quarter, 2020th expenses, excluding servicing fees and transaction expenses were 12.6 million modestly lower than the second quarter.
Concludes our remarks, we will now open the call for questions.
Thank you we will now be contacting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tonal indicate your line isn't the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up your.
[noise] handset before pressing this darkies one moment, please while we Paul for your questions.
Our first question is coming from the line of Stephen laws with a Raymond James. Please proceed with your questions.
Hi, good morning.
Still.
I wanted to follow up on some of your prepared remarks, just about you know I think he said he kinda remain cautious mostly on the sidelines me can you talk about you know are you happy with the current liquidity position, which seems pretty defensive how do you think about your appetite for more stock repurchases or possibly something else in your capital stack you know.
Where do you look at you know where do you see returns kind of undoing new investments, if you decided to deploy the capital offensively.
Hi, Steven Thanks, some questions so.
Right now I think we're we're.
Happy with our liquidity position, but as we looked for rates now being higher for longer than we think to the shore up liquidity makes sense.
Think about our priorities. We look at you know liquidity right now first we do think there are gonna be investment opportunities.
In the near term that are gonna come to us and we would look to the extent that we have the liquidity to deploy then.
And we look at you know stock repurchases, whether it's common or preferred under a variety of factors, but at least in the near term that's probably the third option for US we're looking more at liquidity and investment opportunities and we thank those are.
And I'm Gonna turn it over kind of where we're seeing some of those opportunities to Sudan.
Yeah, Yeah sure. Sir this is Dan tackler. So in terms of the opportunities you know the the primary capital allocations there'll be between <unk>, especially in the D. S. C R Bpl's and jumbo prime duty.
Unable to do so that.
<unk> <unk> <unk>.
Durations Uhm I will point out that you know as far as the securitization economics is concerned it's pretty stable, especially in the <unk> the newly originated in.
Hi, gross lack loans with coupons that on 8.5%.
You know that's sad you know pieces deals on that trip on the eighth of pricing in the high 100.
The worst says made hundreds in the third quarter, so any more underperformers dinner <unk> very cautious there.
You know obviously at a lightning <unk> lighting in sympathy with the agency R. M. B S. So it is kind of stable and compelling at this point, but again you know.
Really quickly and the Macroenvironment B R.
That answer a question.
Yeah. That's helpful color appreciate the comments and and just wanted to verify one thing I think you mentioned 16 million savings in interest expense from the.
You know refinance of a higher cost facility six to seven set benefit their annually is is that writers are at all set to that somewhere.
I think you know.
Yes, I mean that that's the number we expect to say, but you know as you're probably aware and end up early part of next year to a bar preferreds are gonna reset from fixed to float at least we expect that's what's gonna happen based on our current information of the Clickability of.
The the federal law to those particular things and so I think if you as you think about this we believe that this financing at refinancing has been very positive for us, but it it really is going to be primarily offset by what we expect to happen to our preferred stock.
Gotcha right that makes sense. Thank you very much.
Thank you. Our next question is coming from the line of Trevor Craftsman J M. P. Securities. Please proceed with your questions.
Alright, thanks, good morning.
Can you talk about what you guys are seeing in the in the bulk loan market, particularly from the banking sector.
Getting a material increase in supply coming out from banks looking to get ahead of.
Regular forever changes thanks.
Yeah, I I think right now you know from the bulk we're not seeing that much we gotta wait for the term facility to and so it's not been an area that we've been.
Really focusing on right. This.
Given the current situation.
Okay got it.
And then on the the loan facility that you refinanced moving from the.
Nope, not mark to market to a limited mark to market could.
Could you elaborate a little bit on kind of what the change in in the terms of that facility or in terms of protections for you guys and also maybe comment on if you think they're.
Further opportunities to refill.
Refinance any any of your other facilities into.
Local lower cost alternative at this point.
Yeah. So this will this was you know.
A significant facility for us in terms of you know our desire to refinance it you know it was a longer term facility that allowed us the ability to refinance after a year and given where we were able to find financing. It makes sense for us to do that now I think you know we're just on some of the particular terms since it was posed.
Quarter, and we'll have some more detail in.
And our next statements that will go through that but you know it is unlimited mark to market with a with a cap on the right and this is where we think the savings will come from since it's so.
Significant lately below where we were financing as far as you know other opportunities right now the the market has been functioning normally we're able to roll.
You know the really the next you know what I would call high cost facility.
That refinancing opportunity will become an early 2025.
Okay got it that's helpful. Thank you.
Thank you. Our next question is coming from the line of Bose George with K B W. Please proceed with your questions.
Hey, guys. Good morning, Uhm, what's the incremental <unk> on your new money, you're putting to work and and let me think about you know the existing returns you know how long if it breaks remains stable you know when does that role kind of into the new R. Lee and I guess part of it I guess is the the the cost of funding maturities you've been talking.
But but just kind of think about the returns on this portfolio if rates to essentially remained stable.
Alright, so the current portfolio. This is subra. Thank you for your question.
So the current.
In my prepared remarks, I mentioned that the.
The current economic you know net economic returns on a portfolio of auto AE is about 10.4% now that's excluding head. Your expenses are you know excluding.
Other other.
Administrative another Jenny Comcast for US right. So the 10.4 per cent is what we are we are seeing and that is on this hydrated in Wyoming. Obviously, you know if you buy assets, which are yielding higher than what we have today that 10.4 percentage potentially going to throw up.
That's why we are.
Okay, Okay, and then actually.
<unk> of the you know sort of getting to a more normalized are we.
Then does it really kind of depend on rates coming down or just restructuring some of the liabilities over time, you know just trying to think about ways.
This gets too on a on a net basis to a double digit early.
Yeah. So sure this is spelled again so.
Mentioned, we we had one you know high really high cost facility that we were able to refinance and the next one's not until you know the first month or so of 2025. So I think really the financing abilities in terms of restructuring high costs Sweet. We've done you know a chunk of that alrighty, the rest of it's going to come from somewhere.
Great moderation.
Okay, great. Thanks.
Okay.
Thank you. Our next question is coming from the line of Eric Hagen with B T. I G. Please proceed with your questions.
Hey, Thanks, Good morning, sorry, if I missed this but did you guys say what your current book value US through October and then you know going back to the liquidity I mean, what's the right way to think about it just the incremental liquidity that's being generated in you know like on a monthly or quarterly basis, just based on Paydowns.
There's just natural kind of C. P R.
Thank you so.
Oh, sorry, it's just a <unk> on the on the book value since the end of the quarter I'm Gonna turn that over to Dan <unk>, Yeah, Yeah. So at the end.
The investment that that'd be released last night, B X, David Uhm roughly downhill.
But given the strong rally that you know.
The closest the down you know being two per cent horses three per cent.
Okay great.
So and then I think you asked relative to Paydowns is that correct.
Right, Yeah, just the way the things about liquidity, that's being generated sort of incrementally just through you know kind of natural can't Paydowns.
Yeah. So I think you know right now the portfolios running around six C. P. R and in terms of kind of where the paydowns are coming.
But I hope that's helpful for you.
Oh, Okay, Yeah, and then how are we thinking about the option value you have to you know calling reached Securitas how is the existing portfolio.
Really just kind of how sensitive you see you see that optionality being to interest rates.
In Florida.
Yeah. So it it's it's it's sensitive to interest rates, obviously as rates decline. It makes it more economic it also depends on how the transactions of pay down the size of the senior the size of the transaction.
That you would in terms of when you refinance as you look at all of those factors and so right now you know the longer those stay out the better in this environment.
Yeah, and then and then obviously as the CPR picks up it's just gonna be more creative so.
We have this optionalities now and we think it is very valuable, but we're going to be.
Cautious you know in terms of in the near term, but his rates begin to moderate will start to do <unk>.
Look at this more and more closely.
Okay, Alright, thank you guys.
Yeah.
Thank you we have reached the end of our question and answer session. I mean, I'd like to turn the floor back over to fill card is for any closing comments.
Thanks, Thanks, everyone for participating in our third quarter earnings call and we look forward to speaking to you in February with with our call related to fiscal year 2023.
This does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.
Enjoy the rest of your day.
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