Q3 2024 Chimera Investment Corp Earnings Call
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Speaker Change: Greetings and welcome to the Kymarra Investment Corporation's third order earnings call. At this time, all participants are an illicit only mode. The question and answer session will follow the formal presentation. If anyone wants to require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Victor Falvo. How to capital markets? Thank you, you may begin.
Victor Falvo: Thank you, operator, and thank you everyone for participating in Chimera's third quarter 2024 earnings conference call.
Before we begin, I'd like to review the safe harbor statements.
Join us call we will be making forward-looking statements which are predictions, projections, or other statements about future events.
Victor Falvo: These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the risk factor section in our most recent annual and quarterly SEC filings.
Victor Falvo: Actual events and results made different materialy from these four looking statements.
We encourage you to read the forward-looking statement this claimers in our earnings release and our quarterly and annual filings.
We're in the call today, we may also discuss non-gap financial measures.
Victor Falvo: Please refer to our SEC violence and earnings supplement for reconciliation for the most comparable gap measures.
Victor Falvo: Additionally, the content of this conference call may contain time-sensitive information that is accurate only as a date of this earnings call. We do not undertake and specifically this claim any obligation to update and revise this information.
Nick: I will now turn the conference over to our president and chief executive officer, Phil and Curtis. Thanks, Nick.
Phil Curtis: Good morning and welcome to the Chimera Investment Corporations 3rd Quarter, 2024 earnings call. Joining me on the call, our Subra Viswanathan, our Chief Financial Officer, Dan Thacker, our Chief Investment Officer, and Victor Falvo, our head of Capital Markets and Investor Relations.
Phil Curtis: After my remarks about the quarter, I will briefly discuss our recent acquisition announcement and then turn and then Subram will review the financial results before opening the call for questions.
Phil Curtis: After a prolonged period of rising rates and higher for longer inflation abated to a point where the Federal Reserve is more concerned about the softening labor market. In September the Fed cut the funds rate by 50 basis points and provided guidance for another 50 basis point reduction by year end.
Phil Curtis: The market reacted by pricing in a more rapid interest rate decrease than projected by the Fed. The yields on U.S. Treasury notes end of the quarter materially lower with the yield difference showing a positive slope from the two years out to the ten years for the first time since the middle of 2022.
Phil Curtis: We believe achieving a lower short-term funding cost and a steeper yield curve environment will be beneficial for our future operating performance.
Phil Curtis: Since the beginning of the fourth quarter, Treasury yields have risen with the change in market sentiment, mostly due to a stronger economic data and concerns over trade and the federal deficit.
Phil Curtis: As the market has adjusted we expect one more and maybe a second rate cut this year but expect further Fed cuts to be in a smaller 25 basis point increments.
Phil Curtis: Housing fundamentals remain strong for residential mortgage credit. Home prices are higher by approximately 5% on a year-over-year basis and delinquencies and default rates remain low.
Nick: While existing home inventories have increased recently and are at their highest level in the past four years, they are in line with pre-pandemic levels.
Nick: On a more macro level, the housing supply shortage should continue to support home prices, albeit at a slower pace moving forward.
Nick: Investor demand for mortgage credit securities remains strong. Non-agency RMBS issuances for 2024 may reach $100 billion, which would be approximately 40% greater than in 2023.
Nick: We believe market conditions align well with our residential credit strategy.
Nick: In July, we sponsored SIM 2024-R1, a $468 million securitization of seasoned RPLs. We sold securities in a private placement with an aggregate balance of approximately $352 million, or 75% of the capital structure.
Nick: We retained approximately $116 million investment in subordinate bonds in certain I.O. securities. Our weighted average cost of the debt sold was 5.7%.
Nick: In August, we issued 75 million of nine-and-a-quarter unsecured notes due August 15, 2029, which are callable beginning in August of 2026.
Nick: This was our second unsecured bond offer for the year, resulting in a combined total issuance of $140 million.
Nick: While we continue to favor repurchase agreements and securitized debt as a lower cost source of financing for our loans, the ability to issue unsecured debt helps us to further diversify our capital structure and invest in new and accretive assets.
Nick: Upon the issuance we produced and settled on 430 excuse me 543 million agency CMOs. We expect that the leveraged return on this investment will be accretive to earnings and more than exceed our cost of the debt.
Nick: These investments provide attractive returns and a source of capital as we seek to make future investments in residential loans and credit securities.
Nick: Over the course of the quarter, we purchased and settled on approximately $47 million of non-agency subordinate bonds from newly issued mortgage securitizations, backed by collateral that included RPLs and small balance commercial properties.
Nick: We purchase these investments at a discount to their par values and expect to achieve mid-teen returns.
Nick: This quarter we also committed to purchase 118 million of residential transition loans and we expect to close these loans during the fourth quarter. These loans have characteristics like residential transition loans we have purchased in the past. We will use leverage through our warehouse facilities for these loans and expect to achieve levered return in the mid to high teens.
Nick: As we announced a couple weeks ago, we signed a definitive agreement to acquire the Palisades Group, which is an alternative asset manager and residential mortgage credit based in Austin, Texas.
Nick: Like the team here at Chimera, the Palisades Group has a successful history of analyzing and investing in residential mortgage credit.
Nick: We were particularly impressed by their ability to perform deep asset level analysis, review borrower credits, and perform high quality data validation and monitoring of loans. These capabilities overlap quite well and complement Chimera's existing business.
Nick: Also, Palisades brings to us a proven suite of proprietary technologies, and when combined with our own in-house capabilities, will improve upon our strengths in both portfolio and credit risk management.
Nick: Palisades acquisition is complimentary and enables us to provide a new fee based asset management management service for third parties that would like to invest in residential mortgage credit.
Nick: When completed, on a combined basis, Chimera and Palisades will have over $30 billion of notional value in loans and real estate owned, advised, or managed.
Nick: This benefits Chimera as it will increase the depth and breadth of our residential credit expertise while adding strong partnerships with already established investment management and insurance companies.
Nick: We're excited about this transaction and expect it to close in the fourth quarter. We believe we'll achieve accretive benefits from this acquisition in 2025.
Nick: And finally, upon closing, Jack McDowell, the co-founder and chief investment officer of Palisades, will become Chimera's new chief investment officer.
Nick: So what does this mean for Chimera shareholders?
Nick: We feel good about our business. We're finding new opportunities and we've increased the quarterly dividend by 12% over the past two quarters.
Nick: And as we approach the end of 2024, the Federal Reserve has lowered short-term interest rates by 50 basis points and has indicated lower short-term rates may be on the horizon.
Nick: Residential credit markets are robust, which aligns with our business strategy. We've established a new source of unsecured funding through the capital markets, and we believe the acquisition of Palisades will further strengthen and expand our existing business and provide additional opportunities for growth.
Nick: Over the balance of the year, we'll work diligently to close this acquisition. The team at Chimera has a long and successful history of buying and securitizing residential credit assets. And with the acquisition of Palisades, we'll increase and broaden our existing capabilities and add a new fee-based, third-party investment management business.
Nick: We're working hard for our shareholders and we'll continue to seek ways to position the company to achieve the best possible results over the long term.
Speaker Change: I will now turn the call over to Subra to review our quarterly financial results.
Subra Viswanathan: Thank you, Phil. I will review Chimera's financial highlights for the third quarter of 2024.
Subra Viswanathan: Gap net income for the third quarter was $113.7 million or $1.39 per share.
Nick: Gap book value at the end of the third quarter was $22.35 per share.
Subra Viswanathan: the SRAC.
Subra Viswanathan: On an earnings available for distribution basis, net income for the third quarter was 29.9 million or 36 cents per share. Our economic net interest income for the third quarter was 71.5 million.
Subra Viswanathan: For the third quarter, the yield on average interest earning assets was 6.1%, our average cost of funds was 4.5%, and our net interest spread was 1.6%.
Subra Viswanathan: Total leverage for the third quarter was 3.9 to 1, while Ricoh's leverage ended the quarter at 1.2 to 1.
Nick: For financing and liquidity, the company ended the quarter with 648 million in total cash and unencumbered assets.
Subra Viswanathan: For hedging, we had 2.5 billion floating rate exposure on our outstanding repo liabilities.
Nick: We had 1.5 billion pay interest rate swaps at a weighted average fixed pay rate of 3.56% as a hedge position for offloading rate liabilities.
Nick: The company also has a long position in 500 million one-year swaption on a one-year pay fixed interest rate swap with a blended rate of 3.45 percent.
Nick: We had $1.4 billion in either non- or limited mark-to-market features on our outstanding repo agreements, representing 43% of our secured recourse funding.
Speaker Change: As Phil mentioned, we closed our SIEM 2024 R1 securitization during the third quarter. As part of our strategy to mitigate securitization execution risk on certain securitizations,
Subra Viswanathan: We closed out $307 million of short 5-year Treasury futures contract position to protect the net interest spread of SIM 2024-R1.
Subra Viswanathan: For the third quarter of 2024, our economic net interest income return on equity was 10.6%.
Subra Viswanathan: A GAAP return on average equity was 20.3%. Our EAD return on average equity was 6.8%.
Subra Viswanathan: also for the third quarter. The company increased the common stock dividend to 37 cents per share up from 35 in Q2 and 33 in Q1.
Subra Viswanathan: And lastly, for the third quarter 2024 expenses, excluding servicing fees and transaction expenses were $12.8 million, down modestly from the second quarter. That concludes our remarks. We will now open the call for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions.
Speaker Change: Our first questions come from the line of Trevor Cranston with Citizens JMP. Please proceed with your questions.
Trevor Cranston: All right. Thanks.
Trevor Cranston: You talked a lot about some of the opportunities you guys are seeing on the loan side. You know, one thing we've heard from some of the
Trevor Cranston: non-bank originators recently as a focus on trying to grow home equity lending. I was wondering if you could talk about kind of what you guys are seeing there and if you think that's a potential opportunity for Chimera to participate in in the future. Thanks.
Speaker Change: Yes, we are looking at that space and it actually is an area that Palisades has got some experience in. And it's an area that we are looking at.
Trevor Cranston: you know, pretty closely. It just hasn't worked for us right now, but we've heard the same things and we're seeing things that are interesting. We just haven't found something yet to pull the trigger on.
Speaker Change: Okay, got it.
Speaker Change: to Dan Thacker but you know on the other part it's something that you know we haven't traditionally made you know public but let me let Vic address kind of where we think book value has gone.
Speaker Change: The sell-off in the rates market getting more pronounced at this AM as we all saw. The intermediate treasuries that we raised all gains in the quarter plus some. So I would say we are flat this morning Trevor.
Trevor Cranston: Okay, great. Thank you.
Speaker Change: Thank you. Our next questions come from the line of Doug Harder with UBS. Please proceed with your questions.
Doug Harder: Thanks. Just to follow up on that, when you say you're flat from the end of the quarter, I guess what what are you comparing?
Trevor Cranston: What are you comparing that time frame to? Just to make sure we're on the same page.
Speaker Change: So the book value as of end of 9.30 versus the move today?
Speaker Change: That's what we're looking at.
Speaker Change: Yeah, yeah.
Speaker Change: Great.
Speaker Change: Thank you.
Speaker Change: And can you just, you know, talk about with the acquisition of Palisades, you know, kind of how you think about, you know, kind of growth in, you know, kind of broadly defined AUM, you know, how you would think about whether you want that to kind of be on balance sheet for Chimera versus kind of third party funds and how you would look to balance that?
Speaker Change: Sure, so right before I answer, I just want to make sure to clarify, I think what we meant to say on the bulk value is we've given up, you know, most or nearly all of the gains that we showed at the end of
Speaker Change: the third quarter prior relative to the end of the second quarter. So most of that That would be more flat with the second, flat with the June. Yeah. Okay. That's correct. Thank you. Okay. Yeah
Speaker Change: On Palisades, that is something we are working through in terms of how we're going to think about third-party asset management in the fund business. We will develop a pretty detailed allocation policy that will be
Speaker Change: that will work well for Chimera shareholders
Speaker Change: that we create through that. That's kind of an early stage business for them and we'll look to grow that, but we'll look to grow it in a way that's beneficial for all parties.
Speaker Change: Thank you.
Speaker Change: And then, you know, as I said, their third-party asset management is an interesting business, and to the extent we'll look to grow that as well. And they have, you know, capabilities, both investment and collateral management, that we'll find useful on our own portfolio.
Speaker Change: I appreciate that. And then just one more on interest rate exposure. How do you think about your kind of earnings EAD exposure to the...
Speaker Change: to the short end, you know, and, you know, I know you updated your swap positions, but, you know, just how to think about your kind of your net interest spread or earning sensitivity to lower short-term rates or a steeper curve.
Speaker Change: Hey Doug, this is Subra. Thanks for the question.
Speaker Change: The way to think about it is EAD will react both positively and significantly.
Speaker Change: Thank you.
Speaker Change: So that will continue to see some benefit, right? Now, hedging those floating rate liabilities, we have 1.5 billions of swaps, and we have those at a rate of 3.56%.
Speaker Change: losing some of that benefit. However, as the rates go below 3.56%, we will continue to see benefit. Now also, I will remind you that the swaps, most of them mature by the end of the second quarter of 2025. So we'll have to readjust and evaluate our hedging strategy.
Speaker Change: Thank you.
Speaker Change: Outside of that, we have about 525 million dollars of preferred dividends, which are again floating rate, and so those will continue to see benefit right away because of the floating rate changes.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: And then obviously, you know
Speaker Change: As paydowns happen and we reinvest, we should hopefully be able to reinvest the paydowns in higher yielding assets.
Speaker Change: So that's kind of like the summary of how to think about the interest rate sensitivity and how it will affect EAD.
Speaker Change: I appreciate that, that's very helpful.
Speaker Change: Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: Our next questions come from the line of Boze George with KBW. Please proceed with your questions.
Speaker Change: Hi, good morning. This is Frank LaBette on for those.
Speaker Change: Thank you.
Speaker Change: I just wanted to touch on
Speaker Change: The fact that your EAD seems to be running around the $0.36 to $0.37 range, can you just discuss some of the drivers that can get you from here to a double digit net ROE after expenses please?
Speaker Change: I mean I just explained some of the you know EAD growth that we could expect but you know the
Speaker Change: As the rates go down, obviously we will continue to go up, but I would say, I mean, in my proprietary remarks, I did say that, you know, the return on our, you know, our economic net interest, you know,
Speaker Change: Net interest income return on EAD is about 10.6%.
Speaker Change: So we are on an economic, you know, perspective getting the 10.6% and as rates continue to go down and our interest expense...
Speaker Change: go down, we will see some additional benefits.
Speaker Change: Thank you.
Speaker Change: You know, the one other thing that I will say is there are some investments that still don't go through EAD.
Speaker Change: like our you know our investment in a LP investment in an RIA but some of those we will get it but even though it doesn't go through EAD it's really from an economic net interest income perspective we are seeing growth and we will continue to see growth.
Speaker Change: Thank you and then just to follow up given like the current environment where do you see the best opportunities for investing incremental capital going forward? Thanks.
Speaker Change: So, you know, we did the RPL deal, right? So just like the deal, we expect to make low to double-digit returns in there. And in addition, like Phil also talked about in his prepared remarks, that we found attractive pocket services.
Speaker Change: relative value.
Speaker Change: non-agency subs and deployed capital there.
Speaker Change: So those are the things that we are targeting in addition to...
Speaker Change: RTLs, that's where we deployed or committed to buy approximately 118 million. That's gonna get mid to high double-digit returns. So those are the areas that we are focusing on in addition to looking at every sector which kind of meets our return bogeys in non-QM as well as home equity stuff that we just mentioned.
Speaker Change: mention.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next questions come from the line of Eric Hagen with BTIG. Please proceed with your questions.
Speaker Change: Good morning, this is Jake Katsikis on for Eric. Thanks for taking my question. Just wondering if you could walk through the opportunity you have to potentially raise the dividend further or more quickly if you're able to re-securitize the callable debt. Thank you.
Speaker Change: Okay, so I'll start with that. So just like as when we raised
Speaker Change: Capital and we're able to invest it credibly. I think that adds to the earnings power of the portfolio.
Speaker Change: You know, we've held off on the re-levering some of the existing deals, in part because we could raise capital with a lower hurdle than we could in terms of collapsing those deals at the time. But they've now paid down further and rates have come down, so we are looking more aggressively and given where the securitization market is, to begin.
Speaker Change: to look for opportunities to relever and pull cash out and we think there's opportunities to reinvest that money creatively which will be a driver to enhance the returns on the portfolio.
Speaker Change: Great. Appreciate that color. Thank you.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you. There are no further questions at this time. I'd now like to hand the call back over to Phil Kardis for any closing comments.
Speaker Change: fiscal year 2024 report. Thank you very much.
Speaker Change: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.