Chimera Investment (CIM) Q1 2021 Earnings Call Transcript

Image source: The Motley Fool.

Chimera Investment (CIM -0.96%)
Q1 2021 Earnings Call
May 05, 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 first-quarter 2021 earnings conference call and Webcast. [Operator instructions] It is now my pleasure to turn the floor over to Victor Falvo, head of capital markets. Please go ahead.

Victor Falvo -- Head of Capital Markets

Thank you, Tamika. And thank you, everyone, for participating in Chimera's first-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 Officerand Chief Investment Officer

Good morning and welcome to the first-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 our capital markets. After my remarks, Rob will review the financial results and then we will open a call for questions. This quarter we took many proactive steps toward portfolio optimization and the expansion of Chimera's core earnings.

Key drivers of our performance include recirculation of mortgage loans and the refinancing of credit at lower interest rates. The housing market continues to be robust across America. And though longer term interest rates have risen since year end, the interest rates available for residential mortgage remain very low by historical measures. Home prices are increasing at their fastest pace since the first quarter of 2006 and on a year-over-year basis the S&P Case-Shiller index reported 11.2% increase in home price appreciation.

Strong housing demand coupled with a limited supply of homes available for sale provide strong tailwinds in housing finance. Home price appreciation is an important metric when evaluating future mortgage credit performance. Interest rate on 10-year U.S. Treasuries rose 83 basis points this quarter, while short term interest rates remain near zero.

The yield curve deepened over the period with a spread between two-year and 10-year treasury notes doubling to 158 basis points on market concerns of future inflation expectations. Federal Reserve policy remained unchanged this quarter, and the Fed indicated it's believed that recent signs of inflation are expected to be short term in nature and are elevated due to pandemic related issues. Credit spreads on fixed income products tightened as investors continue to seek higher yielding investments for their portfolios. The BMO's high yield index ended the quarter tighter by 57 basis point while spreads AAA rated securitized reperforming loans tightened by an approximately 15 basis points.

The current market conditions have presented a unique opportunity to optimize Chimera's liability structure, locking in low cost financing for many quarters into the future. As part of our call optimization strategy, this quarter we exercise our call rights on six outstanding deals representing $4.1 billion of residential mortgage loans. In February, we issued $2.1 billion CIM 2021-R1 and $233 million CIM 2021-NR1. The mortgage loans for both securitizations were from call and the termination of three CIM securitization previously issued in 2016.

These securitizations created $1.9 billion of new securitized debt at a weighted average cost of 2.04%. The terminated debt had $1.7 billion outstanding with the previous cost of 5.2%, a savings of more than 300 basis points. In March, we issued $1.5 billion CIM 2021-R2 and $240 million CIM 2021-NR2. The mortgages for both securitizations from the call and termination of three CIM securitizations.

previously issued in 2017 and 2018. The March securitizations created $1.5 billion of new securitized debt, at a weighted average cost of 2.24%. The terminated debt had $1.2 billion outstanding, with a previous cost of 4.22%, a savings of about 200 basis points. The high advance rate on these four securitizations enabled us to release equity, locked in from the prior securitizations and lower our costs of securitized debt by 265 basis points.The retained tranches from those securitizations were financed with non mark-to-market repo.

We expect to see the full benefits of all four securitizations in the new quarter. Last week, Chimera issued another inter quarter press release highlighting the continuation on our call optimization strategy. For the month of April we issued $860 million CIM 2021-R3 and $117 million CIM 2021-NR3. The mortgages for both securitizations were from the call and termination of three CIM deals previously issued in 2017.

The April securitizations created $813 million of new debt at a weighted average cost of 2.12%. The terminated debt had $682 million outstanding, with a previous cost of 4.14%. a savings of 200 basis points. The R3 and NR3 deals closed in late April.

Securitizations of assets is a critical component of Chimera's business model. It provides low cost, long term non-recourse debt for mortgage assets on our balance sheet. Securitized debt represents nearly 70% of Chimera's liabilities structure. We expect all the new securitizations issued this year to provide durable portfolio income for many years to come.

At the end of March, Chimera paid off $4 million, 7% secured financing, and retired for cash the associated warrants on approximately 20 million shares. The cash cost on the warrants came at a 10% discount to the value of our common stock and then eliminated any future equity dilution on these shares. The equity recaptured from our first quarter of securitizations enabled us to terminate this debt early and rebalance our liability structure. Our secured financing now stand at $4 billion down for $4.6 billion at quarter end.

The weighted average rate on our secured financing at the end of March was 2.7%, down 70 basis points from 3.4% at year end. The optimization of our securitized debt combined with a continued improvement in our secured financing positions Chimera's portfolio to reap long term benefits, while maintaining little recourse leverage. On the asset side of the balance sheet, this quarter Chimera purchase and securitized NR CIM 2021 J1 and J2 deals, a total of $884 million prime jumbo loans. Separately, through a series of transactions, we purchased $166 million high yielding business purpose loans.

The weighted average coupon on these loans was 8.5% and has an expected portfolio yield of 7%. These loans are short duration and are currently being financed in our loan warehouse. Our agency CMBS portfolio continues to perform well as expected, as increased rate volatility during the quarter we proactively managed to our agency CMBS portfolio. This quarter we sold $182 million Ginnie Mae project loans, generating $14 million in realized gains.

In addition, seven Ginnie Mae project loans were called during the quarter totaling $146 million. Unlike traditional agency pass-throughs, Ginnie Mae project loans carry explicit call protection, and due to this feature we collected approximately $14 million in interest income through P-pay penalties. As we look forward into the second quarter, the housing market remains strong and provides added benefit for improved credit performance. Chimera's portfolio with seasoned low loan balance loans continue to generate solid top-line performance, while demonstrating little sensitivity to prepayments.

Through the end of April, we have re securitized $5.1 billion loans, lowered our cost of financing and freed up capital to help pay down higher cost debt. And over the remainder of 2021, we have eight additional deals with approximately $1.7 billion unpaid balance for potential resecuritizations. Chimera's portfolio is currently structured to offer shareholders an attractive dividend relative to our low recourse leverage. As we near the post pandemic world, Chimera is well positioned to grow our portfolio with additional income opportunity.

And now, I'll turn the call over to Rob to go over the financial results.

Rob Colligan -- President and Chief Operating Officer

Thanks, Mohit. I'll review Chimera's financial highlights for the first quarter of 2021. GAAP book value at the end of the first quarter was $11.44. GAAP net income for the first quarter was $139 million or $0.54 per share.

On a core basis. net income for the first quarter was $87 million or $0.36 per share. Economic net interest income for the first quarter was $136 million. For the first quarter, the yield on average interest earning assets was 6.4%.

Our average cost of funds was 3.3%. And our net interest spread was 3.1%. Total leverage for the first quarter was 3.6:1, while recourse leverage ended the quarter at 1.1:1. For the quarter, our economic net interest return on equity was 15%.

And our GAAP return on average equity was 17%. Expenses for the first quarter, excluding servicing fees and transaction expenses were $18.6 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 Doug Harter with Credit Suisse.

Doug Harter -- Credit Suisse -- Analyst

Thanks. Rob, can you just talk about what was the factor that drove the declining book value this quarter?

Rob Colligan -- President and Chief Operating Officer

Sure. The primary driver of that was paying the warrant. It was about $220 million or $0.95. Outside of that book value was relatively flat.

We made some markups and markdowns loans. In particular we're up in the quarter. Agencies, with an increase in rates were down. And non agencies were down slightly.

But I think all that offsets pretty cleanly. I think the biggest drivers is the warrant for the quarter.

Doug Harter -- Credit Suisse -- Analyst

Great. Thanks, Rob. And then, I guess, as you look at kind of incremental dollars that you're putting to work, where are the most attractive opportunities that you see today?

Mohit Marria -- Chief Executive Officerand Chief Investment Officer

Hey, Doug, this is Mohit. So, as we mentioned in the opening remarks, we're still focused on acquiring more business purpose loans, given the rate environment we're in, keeping the duration short on those assets, it's helpful and it creates a pretty high yielding asset for us. On a cash basis, it's 17% and with some financing on a warehouse line, you're looking at very high teens, almost 20%, levered returns. We are still committed to our season reperforming loan strategy.

As you can see, the market is still pretty strong on the new issue side, as reflected in the securitizations we've been able to do. Q1 was relatively quiet in terms of loan sales. The GSEs are the largest supplier. Their first loan sale happened at the very end of the quarter.

But there was not much too sort of focus on that side. But we still think they will have between the $218 billion of loans to sell. So we'll continue focusing on that and using securitization to enhance the backend returns.

Doug Harter -- Credit Suisse -- Analyst

Great. Thanks, Mohit.

Operator

[Operator instructions] Your next question is from a line of Bose George with KBW.

Unknown speaker -- KBW -- Analyst

Hey, everyone. This is actually Mike on for Bose. I was just wondering if you can talk through when does it decision to raise the dividend? Is any expectations for capital deployment or changes in leverage or funding costs reflected in this?

Rob Colligan -- President and Chief Operating Officer

Hey, Mike. I think it's all of those, right? I mean, as you can see from the relevers that we've completed through April, which represent about 70% of what we came into the year looking to do. The average cost savings is over 265 basis points. If you look at our overall recourse repo, some of the financing we took in place last year was pretty expensive, that has stepped down quite a bit.

I think it's about a 70 basis point drop. And the lack of assets that we were able to find in Q1, as I just mentioned on the earlier question, gives us the ability to deploy that capital in the second half of the year here as the GSE sales ramp up. Though, I think the earnings power of the company is driven by the relevers given the cost savings. And that's what gave the board comfort to increase the dividend.

And as an investment opportunity to become available, the additional equity, we've freed up from these relevers give us a good position to add assets on a go forward basis.

Unknown speaker -- KBW -- Analyst

Great. That's very helpful color. And then can you just provide a quarter-to-date book value estimate?

Rob Colligan -- President and Chief Operating Officer

Rates have sort of rallied since March 31. But I would say, credit spreads are probably flat to where they were on March 31. As our agency spreads, I think book value would be unchanged over the last 30 days.

Unknown speaker -- KBW -- Analyst

Great. Thank you for taking my questions.

Operator

At this time, there are no further questions.

Mohit Marria -- Chief Executive Officerand Chief Investment Officer

Thanks Tunica. And thank you everyone for joining us on our Q1 call. We look forward to speaking to you all on our Q2 call. Thanks.

Operator

[Operator signoff]

Duration: 18 minutes

Call participants:

Victor Falvo -- Head of Capital Markets

Mohit Marria -- Chief Executive Officerand Chief Investment Officer

Rob Colligan -- President and Chief Operating Officer

Doug Harter -- Credit Suisse -- Analyst

Unknown speaker -- KBW -- Analyst

More CIM analysis

All earnings call transcripts