Chimera Investment (CIM) Q4 2020 Earnings Call Transcript

Chimera Investment (CIM -0.76%)
Q4 2020 Earnings Call
Feb 10, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation fourth-quarter and fiscal year-end 2020 earnings conference call and webcast. [Operator instructions] It is now my pleasure to turn the floor over to Victor Falvo, head of capital markets, to begin.

Victor Falvo -- Head of Capital Markets

Thank you, Laurie, and thank you, everyone for participating in Chimera's fourth-quarter 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 upon 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 do not undertake and specifically disclaim any obligation to update or revise this information. I will now turn the conference over to our CEO and chief investment officer, Mohit Marria.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Thank you, Vic. Good morning and welcome to the fourth-quarter 2020 earnings call for Chimera Investment Corporation. Joining me on the call today are Choudhary Yarlagadda, our president and chief operating officer; Rob Colligan, our chief financial officer; and Vic Falvo, our head of capital markets. After my remarks, Rob will review the financial results, and then we will open the call for questions.

Before we begin, in November, we announced the retirement of Matt Lambiase. Matt founded and led Chimera since 2007. Under his leadership, Chimera grew to a $3.8 billion mortgage REIT and paid more than $5.2 billion in dividends to shareholders. Matt was a great leader, friend and mentor for everyone in our company.

We want to thank him, and we all wish Matt the best of success in his future. This quarter, Chimera continued its path of book value reappreciation. Throughout the year, we worked diligently on the liability side of our balance sheet to enhance liquidity and strengthen our cash position. These actions enabled us to retain our high-yielding credit portfolio and benefit from the improvements in asset prices that started in the second half of 2020.

Chimera's book value improved nearly 4% in the fourth quarter and over 16% at the middle of the year. This improved book value, combined with the company's dividend policy, has generated a 6% economic return for the fourth quarter and a 22% economic return since June 30, 2020. The housing market is robust across America. The Federal Reserve has been very supportive of agency mortgage-backed securities with open market purchases for its own portfolio.

The Fed's purchases have helped lenders offer low mortgage rates to homeowners for new home purchases as well as lowering the cost of homeownership for those that desire to refinance. The National Association of Realtors recently reported that in December, contract closing for existing homes increased with annualized pace of 6.76 million units. This is the strongest pace we have seen since late 2006. Housing inventories are low, demand is strong and mortgage rates are at all-time historic lows.

These are all indicators for continued performance in the housing and residential mortgage credit. Chimera has a unique and differentiated residential credit portfolio among mortgage REITs. At year-end, our GAAP investment portfolio included $12.6 billion of mortgage loans and $2.5 billion of non-agency RMBS. Over 90% of the loans in non-agency securities on our balance sheet were originated prior to 2010.

With strong underlying housing fundamentals and the prospects of a post-pandemic economic recovery, we believe our seasoned mortgage portfolio of loans in non-agency RMBS is uniquely positioned to perform well. The securitization market has demonstrated depth and resiliency in the past year and is a key component of our company's liability management. Spreads on securitized mortgage loans widened as the pandemic began in the spring of 2020. Subsequently, these spreads have grown tighter and closed the year at historically low levels.

Securitization enables us to finance our mortgage loans for longer term by transferring them from our loan warehouse into mortgage trust as we sell senior notes in each deal. This process helps the company to accomplish a desired asset liability mix, while providing long-term nonrecourse financing. For the full year, we sponsored seven reperforming loan securitizations, two prime jumbo securitizations, one agency eligible investor loan securitization and one non-performing loan securitization. In total, Chimera sponsored $4.2 billion and 11 separate securitized deals for the calendar year 2020, and we retained $655 million in subordinate notes.

Securitization is Chimera's primary source of financing for our loan portfolio, and as of year-end, securitized debt represented more than 60% of Chimera's liabilities. We firmly believe that retention of subordinate notes from Chimera-sponsored deals provides the best levered returns available in the market. Secondarily, we utilized repo and other forms of secured financing for warehouse loans and subordinate notes as we seek to enhance our portfolio returns. Since the onset of the pandemic, we have taken aggressive actions to reduce Chimera's financing risk by lengthening and strengthening our secured credit facilities.

At year-end, we have $3.2 billion of credit-related secured financings, which is 37% less than we were financing at the year-end 2019. The average maturity of our credit-related financing is 15 months and $2 billion, or roughly two-thirds are either nonmark-to-market or limited mark-to-market. In April, we issued convertible debt. Concurrent with our offering, the company entered into a capped call transaction.

During the fourth quarter of 2020, we exercised a capped call option, and the company elected to receive a settlement of approximately 4.7 million shares for our common stock, which were then retired. The retirement of these shares reduces the company's share count, benefiting the book value and future returns of our company. Last night, our board of directors increased the size of our outstanding common stock repurchase authorization to 250 million. This provides a valuable tool for our team as we evaluate the merits of new leverage investment opportunities related to the potential benefit of stock -- common stock repurchase.

Our balance sheet is strong, and we remain focused on delivering long-term value for shareholders. Now, I would like to go through the fourth-quarter portfolio activity. In October, we issued CIM 2020-R6, with $418 million of reperforming loans purchased in September. The underlying loan from the deal had a weighted average coupon of 5.25% and a weighted average loan age of 164 months.

The average loan size in the R6 transaction was $102,000 and had an average LTV of 71%. The average FICO score of the borrower was 638. We sold 334 million senior securities from the deal and retained 84 million in subordinate notes, plus interest-only securities. Our cost of debt for the CIM 2020-R6 was 2.19%, with an 80% advance rate.

In November, we issued CIM 2020-R7 and CIM 2020-NR1. The R7 deal consisted of $653 million reperforming loans from the called CIM 2017-8 securitization. The underlying loans in the deal had a weighted average coupon of 6.38% and a weighted average loan age of 172 months. The average loan size in the R7 transaction was $81,000 and had an average LTV of 60%.

The average FICO score of the borrowers was 662. We sold $552 million senior securities from the deal and retained $91 million in subordinated notes, plus interest-only securities. Our cost of debt for the R7 deal was 2.22%, with an 86% advance rate. The collateral for the NR1 securitization was $132 million of non-performing loans called from CIM 2017-8 deal.

The underlying loans had a weighted average coupon of 5.76% and a weighted average loan age of 170 months. The average loan size was $100,000, had an 86 LTV and a 589 average FICO. We sold $84 million notes, with a 4.49% cost of debt and a 64% advance rate. Chimera retained $48 million of subordinate notes.

The R6, R7 and the NR1 deal were not rated by any of the rating agencies. In December, we issued CIM 2020-J2, our second prime jumbo securitization for 2020. The deal was rated by Moody's, Fitch and DBRS and had $327 million loans, with a weighted average coupon of 3.09% and a weighted average loan age of two months. The average loan size was $912,000 and at an average FICO of 782 and an average LTV of 64%.

As we begin 2021, the housing market is booming, our mortgage portfolio continues to perform well, and we have ample cash position to make new investments. Interest rates are at historic lows, and the securitization market is strong, with spreads on some classes near all-time tights. This year, we will continue to seek ways to improve upon or lower our liability cost for securitized debt as well as the back-end financing of our retained securities from Chimera securitizations. As of year-end, Chimera owns call rights from 7 billion in 16 previously issued same deals that are either currently callable or will become callable in 2021.

This provides a source of product to meet strong investor demand. And lastly, our company's leverage is low. As market conditions improve, we can increase our leverage either by growing assets, repurchasing equity or both. Chimera is well positioned as we begin 2021.

We will use all the tools available to deliver the best risk-adjusted dividend to our shareholders. I will now turn the call over to Rob to review the financial results.

Rob Colligan -- Chief Financial Officer

Thanks, Mohit. I'll review Chimera's financial highlights for the fourth-quarter and full-year 2020. GAAP book value at the end of the fourth quarter was $12.36 per share, and our economic return on GAAP book value was 6% based on the quarterly change in book value and the fourth-quarter dividend per common share. GAAP net income for the fourth quarter was $129 million or $0.49 per share and $15 million or $0.07 for the full year.

On a core basis, net income for the fourth quarter was $72 million or $0.29 per share, and it was $334 million or $1.46 per share for the full year. Economic net interest income for the fourth quarter was $117 million, and it was $513 million for the full year. For the fourth quarter, the yield on average interest earning assets was 5.9%, our average cost of funds was 3.6% and our net interest spread was 2.3%. Total leverage for the fourth quarter was 3.6 to 1, while recourse leverage ended the quarter at 1.2 to 1.

For the fourth quarter, our economic net interest return on equity was 12.5%, and our GAAP return on average equity was 15.8%. Expenses for the fourth quarter, excluding servicing fees and transaction expenses, were $18 million, up slightly from last quarter. That concludes our remarks, and we'll now open the call for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Bose George of KBW.

Unknown speaker

Hey, guys. This is actually Mike on for Bose. So my first question is I was wondering if you could just talk about maybe where you're seeing the best opportunities to deploy capital between RPLs, jumbo, investment property. Last quarter, you mentioned season RPLs.

Is that still the case?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Hey, Mike. This is Mohit. Thanks for joining us. Yes.

I mean, season reperforming has been the core strategy for the company since 2014. It still offers tremendous value in the loan upside from just mitigated losses given the strong housing fundamentals, coupled with how strong the new securitization market is and where you're able to achieve term financing. So we think -- we still think the back-end pieces that you would retain offer tremendous value.

Unknown speaker

Got you. And then I think last quarter, you mentioned that the cash yield on RPLs is still high single digits. So when I look at some of the recent maybe Fannie RPL sales, it looks like everything is pricing above par. So I was just wondering if you can maybe walk through the math to get to that high single-digit yield, if that's still the case.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Yeah. I mean, yields on most things have come in. As you just mentioned and alluded to, the GSE sales that took place in Q4, spreads have come in quite meaningfully. And most of loan packages in the RPL space are trading at par or above par.

But at the same time, on the new issue side, spreads have also come in quite significantly. On the rated side, you could affect a securitization at the AAA level at 60 basis points. So your back-end returns, and that probably represents about 70% of the capital structure. And if you go down to the investment-grade stack, which probably gets you to an advance rate of 85%, you're looking at an all-in blended execution around mid, high 100s to swaps on that basis.

So like I said, your back-end returns won't be high single digits anymore. Probably, it would be mid-high single digits as if -- as all of the spread products have come in, but there was some leverage you could produce double-digit returns on that retained piece.

Unknown speaker

Great. That's helpful. And then on the business purpose loans, can you just maybe talk through some of the economics there and the math with regards to the asset yield and ROE because I just assumed that if you're not originating those loans again, then sale margins are -- must be pretty high right now?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Yes. So on the business purpose loan front, I mean, our portfolio, we've been focused on growing that portfolio. It's a $200-plus million now. Given the short duration nature, I mean, we have a lot of pay downs on a monthly basis, but the gross coupon on the originations is probably just under 9%.

And net of servicing fees and asset management fees, you're probably looking at a six -- a little over 6% coupon on a net basis, with price execution just around par or slightly above par. So your levered returns there, again, are going to be well into the double digits on that product for a relatively short-duration asset. Replacing the asset is a bigger challenge than sort of the returns offered by it given the short nature -- short-duration nature of it.

Unknown speaker

Great. That's helpful. And then just one more on the buyback. You increased the authorization to $250 million.

Can you just remind me what was the previous authorization?

Rob Colligan -- Chief Financial Officer

Sure. We had $150 million before.

Unknown speaker

Gotcha. And how much is currently available?

Rob Colligan -- Chief Financial Officer

So $228 million. We used $22 million last year.

Unknown speaker

OK, great. Thank you so much for taking my question. I appreciate it.

Rob Colligan -- Chief Financial Officer

Thanks, Mike.

Operator

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

Doug Harter -- Credit Suisse -- Analyst

Thanks. Mohit or Rob, can you guys walk through kind of what your cost of financing was on the securitizations you did in the quarter? Can you just compare that to what the cost of the financing that was being replaced was, just to get a sense of the change?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Sure. So -- hey, Doug. This is Mohit again. So the securitization, we did four securitizations.

The 2020-R6 was not a relever. That was just loans we had acquired at the end of September that we put right into a securitization in early November. So -- and the cost of funding there on a term basis, as we said, was around 2.19%. The relever that we did was CIM 2017-8.

We saved, based on the relever, about 100 basis points in cost savings. We issued debt, as I said, around 2.22% with an 85%, 86% advance rate. So prior to the relever, it was over 3.2% or 3.25% roughly.

Doug Harter -- Credit Suisse -- Analyst

Got it. And on the deals that you said are either callable today or callable in '21, assuming securitization markets kind of stay where they are, would you expect comparable amount of savings?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

So I'll give you some stats here. So of the 16 deals that have become callable, that represents roughly $6 billion or $7 billion of UPB, with current sec debt that's associated with that of $4.8 billion. That debt has a current yield of 4.27%. And as I mentioned earlier, we think in the new issue space right now, you could issue non-rated securitizations somewhere between two to two and a half, depending on the collateral profile and the advance rates that you're willing to get.

So it's actually going to be a bigger number than what we were able to achieved on the 2017-8 relever.

Doug Harter -- Credit Suisse -- Analyst

That's helpful. And then you also mentioned that kind of as opportunities present themselves, you have the ability to increase your -- increase leverage. Can you just help size that and kind of how you -- or how we could think about that opportunity?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Yeah. I mean, if you look at the core focus of the company, which is the season reperforming space, the GSEs took a pause during the pandemic last year and picked up the pace of selling in the back half of the year. We think they're still behind schedule, and the portfolio has grown as a result of the pandemic. Though on the season reperforming side, there's still north of $100 billion of loans that will need to be disposed from the GSEs, probably between $18 billion to $22 billion on an annual basis.

So that's still a primary source of collateral for us. There are also some funds that will probably liquidate some assets, some banks given where pricing has come, as we just alluded to. A lot of that space is now at par or, in some cases, above par. So again, there's a robust pipeline of loans that will become available for sale today or over the course of 2021.

And given the strength of the new issue market and lack of legacy assets available, we think spreads there will remain at these levels, which is almost approaching the all-time tights from an issuance standpoint. So the term financing markets are pretty strong. The yields have come in on the underlying loans. But on a structural levered basis, coupled with some limited recourse leverage, you could still produce double-digit returns.

Rob Colligan -- Chief Financial Officer

Yeah. Hey, Doug. This is Rob. Yes, just to add there.

If you go back a year, a lot of our thesis or plans for last year was to resecuritize and reduce funding costs. And obviously, COVID-19 pandemic and other things put a lot of things for many companies on hold. But going into this year, we have additional deals to relever, and the securitization market is very liquid, and the cost is low. So I think we're pretty optimistic about 2021.

Doug Harter -- Credit Suisse -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Eric Hagen of BTIG.

Eric Hagen -- BTIG -- Analyst

Hey, good morning. A couple of questions. Can you talk about how you're hedging the CMBS portfolio now? And any tweaks or additions you've made since year-end? And maybe just how you like the -- that as a source of liquidity relative to agency pass-throughs? And then on the portfolio of callable securitized debt, can you frame just some of the factors that drive the decision to call? And maybe more, importantly, as you complete incremental deals, can you talk about your appetite to lever the retained piece? Thanks.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Hey, Eric. Let me start with the Agency CMBS question. So as of Q4, we still had no hedges on that book. So -- and we currently have not changed that in Q1 as well, even with the market having sold off 25 basis points on the 10 year.

If you go back to the weighted average coupon on our Agency CMBS book, it's north of 4%. And given how much the market rallied from 2019 to 2020, based on that coupon, based on the duration of those assets, the implied price would be in the mid-high teens, so it will be around $116 to $117 price. And given the prepaid protection that's exhibited in these assets, with a hard prepay penalty in most cases of 10 years, the prices are sort of artificially capped around that 110 to 112 in area, depending on the loan that you're looking at. So with the market selling off, as it did even in Q4, the price of our Agency CMBS portfolio was unchanged, sort of leading to spread tightening that most other spread products also witnessed.

And I think, it's a similar trend as sort of being witnessed in Q1 so far. So yes, we have no hedges on at the moment. We are keeping an eye on what happens for the 10-year given sort of the duration sensitivity of the portfolio, but we think there's still some spread tightening that could occur within that product. So we think the cost of hedging is not just needed at the moment.

As it will go into your second part of the question on the call and relever strategy, as I mentioned, we have $4.8 billion of debt at a weighted average cost of 4.27%. And if you look at where we could issue new issued debt, that is a big determinant on when and how frequently we would call those deals, subject to market conditions, of course. In addition to that, that $4.8 billion of debt, relative to the $7 billion of collateral that's underpinning it, represents roughly a 68% advance rate on UPB. And based on market conditions and the performance of that collateral, in addition to reducing the cost of debt, we will also be able to take out equity because we think we'll probably be able to sell an effective 80% to 85% advance rates on new securitizations, generating more capital to deploy into new attractive investment opportunities.

Eric Hagen -- BTIG -- Analyst

Right. Sorry, go ahead.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

I was just going to say it's going to be both a cost saving on term financing as well as a potential takeout for equity.

Eric Hagen -- BTIG -- Analyst

Got it. I was hoping maybe you can give some thoughts or guidance around your appetite to lever the retained piece as you complete those deals this year.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

I mean, I think where our leverage is at 1.2 times on a recourse basis, coupled with the large cash position that we have and a large unencumbered asset position we have, we're pretty comfortable financing the back-end pieces. But unlike prior to the pandemic, I mean, we're working on strategies to have either nonmark-to-market or limited mark-to-market on those financings on a go-forward basis. We were always focused on having the balance sheet on a mark-to-market basis. But in addition to having committed balance sheet, we also want to focus on making sure that we could finance these with limited mark-to-market or, I guess, at a nonmark-to-market basis.

Eric Hagen -- BTIG -- Analyst

Right. And as the market has come in and tightened, is there any appetite or ability to pay down the line that you got from Ares last year and essentially refinance it into lower cost nonmark-to-market term funding for the retained pieces?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Yeah. I mean, I think that's another tool. Like our focus, as it was in the better part of 2020, remains on the liability side, both on the securitizations that we have callable and the cost savings on those, coupled with just our repo borrowings. I mean, if you go back to December of '19, the cost of financing on our credit portfolio was 3.19%.

As of the end of Q4 2020, the cost of borrowing is at 5%. Now obviously, in times of crisis, borrowing money was expensive, but we borrowed it for a short time, and we could have the ability to refinance that. So coupled with the securitizations, even our repo borrowings have meaningful upside to potential earnings for the company in 2021.

Eric Hagen -- BTIG -- Analyst

Got it. Great. Thank you very much for the comment.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Thanks, Eric.

Operator

[Operator instructions] Your next question comes from the line of Trevor Cranston of JMP Securities.

Trevor Cranston -- JMP Securities -- Analyst

Hey. Thanks. Good morning. First question, Rob, I was hoping maybe you could take us through kind of what the main drivers were of the $0.04 decline in core EPS from last quarter to this quarter.

And then the second question, sort of in light of where earnings are and the compression that there's been on new investment spreads, can you guys maybe just provide some general thoughts around how you guys are thinking about the dividend level heading into 2021? Thanks.

Rob Colligan -- Chief Financial Officer

Sure, Trevor. Thanks for the question. Going from last quarter to this quarter, we have had some portfolio paydown. But I think one of the bigger drivers, and we may have touched on this in last quarter's earnings call, on the ACMBS side, we did have a number of prepayments on that portfolio where we received penalties, those who have lockouts and some yield maintenance provisions on them.

So if they do pay off early, we do receive some prepayment penalties. So we had a little bit higher than normal. If you looked at the yields on ACMBS, in particular, last quarter, they were almost abnormally high versus this quarter, you got back to a normal sledding. I don't think we had very many, if any, paydowns.

So I'd say, last quarter was a little bit higher in that regard versus this quarter. And then going forward, I think we'll -- we're looking at it, but I obviously have opportunities to reduce some of our liability costs. On spread compression, maybe Mo can add some color.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Sure. That's all right. Yeah, your second part of your question about how we think about dividend given sort of the compression and yields experience, the good thing, as we stated in our opening remarks, is we have a pool of assets where we could optimize the financing. As I said, we have $4.8 billion of sec debt at a current basis of 4.27%.

So to drive and maintain our dividend, that cost base is going to go down over 200 basis points. So on $4.8 billion, you're going to save 200 basis points on a go-forward basis. It will drive the earnings power of the company for 2021 and beyond. And as I just alluded to, on the recourse repo side, on our credit borrowings, we were at a cost of fund of 5.03%.

And given how flush that market is with cash, that's another source of reducing our cost and driving earnings in 2021 and beyond.

Trevor Cranston -- JMP Securities -- Analyst

OK. That's helpful. And then historically, your guys' portfolio has paid off quite slowly. I was wondering if you could provide some color around sort of how prepay speeds have progressed over the last several months and what the outlook is for that going forward.

Thanks.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Yeah. I mean, the uniqueness of our portfolio is just that. But I think if you look at our credit portfolio, which is our largest position, prepayments have remained flat throughout the pandemic. I mean, if you looked at Jan prepayments, they were around 9, 10 CPR.

And if you forward to Jan 2021, speeds remain consistent around that nine to 10 CPR basis. These borrowers have been in the money, but due to the credit impairment nature of their credit standings, it just hasn't changed, and we don't expect that to change in 2021 either.

Trevor Cranston -- JMP Securities -- Analyst

OK, great. Appreciate the comments. Thank you.

Operator

Thank you. I will now turn the call to Mohit Marria for any closing comments.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Thank you all for joining us on our Q4 earnings call, and we look forward to speaking to you on our Q1 earnings call later this -- in May. Thank you.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Victor Falvo -- Head of Capital Markets

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Rob Colligan -- Chief Financial Officer

Unknown speaker

Doug Harter -- Credit Suisse -- Analyst

Eric Hagen -- BTIG -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

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