Chimera Investment (CIM) Q1 2022 Earnings Call Transcript

Chimera Investment (CIM 2.24%)
Q1 2022 Earnings Call
May 05, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Chimera Investment Corporation first quarter 2022 earnings call. [Operator instructions] At this time, it is my pleasure to turn the floor over to your host, Victor Falvo, head of capital markets. Sir, the floor is yours.

Victor Falvo -- Head of Capital Markets

 Thank you, operator, and thank you, everyone, for participating in Chimera's first quarter 2022 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 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

 Thanks, Vic. Good morning, and welcome to the first quarter 2022 earnings call for Chimera Investment Corporation. Joining me on the call today are Choudhary Yarlagadda, our president and chief operating officer; Subra Viswanathan, our chief financial officer; and Vic Falvo, our head of capital markets. After my remarks, Subra will review the financial results, and then we will open the call for questions.

Last year, we began to prepare for a higher rate environment by optimizing our liability structure, which included the resecuritization of $6 billion of our loans with long-term fixed rate coupons. As rates began to rise this year, we have begun implementation of the next leg of our strategy to acquire high-yielding residential loans while continuing to obtain long-term financing through securitization. The dramatic increase in headline inflation and widening of credit spreads, which began late last year, continued during the first quarter of 2022. The Federal Reserve Board began to raise short-term rates and announced it will stop new purchases of agency mortgage-backed securities and possibly reduce its current treasury and MBS portfolios.

Markets reacted swiftly to Fed pronouncements causing 2-year treasury notes to increase by 160 basis points, 10-year treasury yields increased by 83 basis points and 30-year mortgage rates increased by approximately 160 basis points, all occurring over the course of the first quarter. This combination of high volatility and higher interest rates impacted our book value, which was down 14% for the quarter. At the same time, this environment created opportunity for Chimera to increase our investment portfolio of residential loans at yields much higher than were available last year. This quarter, we committed to acquire about $800 million of reperforming residential loans.

We have settled $570 million into our loan warehouse and expect to settle on the remaining loans early in the second quarter. New purchase activity, coupled with the settlement of loans purchased late in 2021, enabled us to settle on nearly 1 billion loans in the period. We expect these loan acquisitions to contribute to our earnings immediately and look to add more loans as interest rates continue to rise. In February, we sponsored CIM 2022-R1, our first securitization of the year, collateralized by seasoned reperforming residential mortgage loans with a principal balance of $328 million.

The loans had an average coupon of 4.61% and are 169 months seasoned. Securities issued by CIM 2022-R1 with an aggregate balance of approximately $264 million were sold in a private placement to institutional investors. The senior securities were rated AAA by Fitch and DBRS and represent approximately 80% of the capital structure and have a 3% fixed rate coupon. We retained $64 million of subordinated notes and interest-only securities for investment.

Chimera retained an option to call the securitized mortgage loans at any time beginning in February 2027. Considering the market volatility and increase in interest rates this period, I would like to take a moment and discuss the liability structure we have worked so diligently to establish for our balance sheet. Securitization remains a primary source of funding for our mortgage assets. This debt is permanent and has been structured with call features that enable us to optimize our liabilities over the long term.

At quarter end, $8.1 billion of securitized debt represented 70% of our mortgage asset funding. $7.9 billion, representing 98% of our securitized debt, have fixed rate coupons. The average rate of our $8.1 billion outstanding securitized debt as of March 31 was 2.5%. The remaining 30% of our liabilities are comprised of repo or secured financing commitments.

At quarter end, we have $3.4 billion secured financing agreements, representing only one turn of recourse leverage on our total capital. Of the $3.4 billion total, $1.9 billion or 56% of our secured financing is used to finance non-agency RMBS, which includes our retained securities from securitizations. This portion of our financing has laddered maturities ranging from one month out to three years. 64% of the $1.9 billion were structured with non-mark-to-market or limited mark-to-market pricing arrangements on the underlying assets, and only 36% have a mark-to-market pricing feature to the underlying assets.

The remaining $1.5 billion or 44% of our secured financing agreements are used to fund our warehouse loans and agency securities. We intentionally have kept the duration on this portion of our financing to shorter term to provide maximum flexibility for future securitizations of our loans and the management of early prepayments received on our Agency CMBS. The average rate on March 31 of our full $3.4 billion of secured funding was 2.53%, up 23 basis points from year-end. Our assets are performing well, and we believe our liabilities are well positioned.

The company currently has a share repurchase plan in place, which allows us to repurchase up to $226 million of our common shares. Given the sharp movement in our share price relative to our book value, we plan to evaluate the benefits of share repurchases in conjunction with the added benefit of other investments to maximize the long-term benefit to our shareholders. To summarize, over the past several years, we have accumulated a high-yielding portfolio of residential loans and securities that have been primarily funded through securitization. We have locked in a low-cost fixed rate financing for this portfolio and are regularly utilizing call provisions to optimize our net interest spread.

Since the beginning of the pandemic, we have restructured our secured financing agreement to protect our portfolio during periods of high volatility and market dislocation. Higher interest rates and wider credit spreads represent potential opportunities to grow our portfolio. We have a large share repurchase plan at our disposal, and we believe we are well positioned to continue to maximize dividend income for our shareholders over the long term. I will now turn the call over to Subra to review the financial results for the quarter.

Subramaniam Viswanathan -- Chief Financial Officer

 Thank you, Mohit. I will review Chimera's financial highlights for first quarter 2022. GAAP book value at the end of first quarter was $10.15 per share and our economic return on GAAP book value was negative 11.5%, based on quarterly change in book value and the first quarter dividend per common share. GAAP net loss for the first quarter was $281 million or $1.19 per share.

On an earnings available for distribution basis, net income for the first quarter was $94 million or $0.39 per share. For onetime nonrecurring items, we had approximately $0.07 of income that was derived from securities called during the quarter. Our economic net interest income for the first quarter was $138 million. For the first quarter, the yield on average interest-earning assets was 6%.

Our average cost of funds was 2.3% and our net interest spread was 3.7%. Total leverage for the first quarter was 3.5 to one while recourse leverage ended the quarter at one-to-one. For the quarter, our annualized economic net interest return on average equity was 15.6% and our GAAP return on average equity was negative 29.72%. And lastly, our first quarter expenses, excluding servicing fees and transaction expenses, was $17 million, down slightly from the previous year.

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

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Bose George. George, please state your question.

Michael Smyth -- Keefe, Bruyette and Woods -- Analyst

This is actually Michael Smyth on for Bose. Just one on the securitization markets. Can you just provide some color on whether or not some of the older inventory has cleared? Just wondering if some of the pressure has eased up. And then, as a follow-up, have you seen any changes in loan prices to reflect the wider spreads in the securitization market?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Hey. Good morning, Mike, this is Mohit. I'll start with your second question and then sort of address the first one. As I mentioned in the opening remarks, mortgage spreads widened quite significantly in Q1, which did adjust loan pricing irrespective of what happened in the securitization market, but the securitization market compounded that effect given the credit widening that took place in relation to just the market volatility.

A lot of the overhang, if you're talking about new origination was absorbed, and there was a significant amount of deal issuance relative to Q1 of 2021 in a much lower rate environment. I think the pull-through rates on what the production coupon was changed materially and the originators and issuers that bought from originators did bring a fair amount of non-QM and jumbo deals that was unexpected. And we touched upon this in our Q4 earnings call as well, and that's where we saw a lot of spread widening and that also trickled down into some of the RPL space, which the issuance was a much smaller percentage of overall new issue securitizations.

Michael Smyth -- Keefe, Bruyette and Woods -- Analyst

Great. Great. That's helpful. And then, maybe just one on leverage.

What's the level you're comfortable running at at? And then maybe what would you need to see in the market to get comfortable kind of going on offense here?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

So, I mean, as we highlighted on the call, we have done on the offensive. We did add $800-plus million of new loans to the investment portfolio. Given the volatility of securitization that you just asked about, is why we only completed one securitization so far as the market stabilize, which they seem to be doing here in Q2, we may bring more deals to the market to term finance some of the loan acquisitions. Our leverage did go up from 0.9 to one turn of recourse leverage for the quarter.

We still have ample liquidity, $1.5 billion in total that we look to deploy as in either investments or like I said given the hit to our stock price relative to where our book value is, we're going to evaluate from a relative value basis where to deploy the next dollar of investments. As far as what's the composition of the leverage could be, it's a function of the type of assets we buy. Our focus remains on credit assets. But given the widening that's taken place in agencies, if you buy more agencies, leverage would run a little bit higher.

But if it's more credit focused, we would run leverage to where we are to generate compelling returns. But the ROE will be the focus on determining where the next dollar of cash goes.

Michael Smyth -- Keefe, Bruyette and Woods -- Analyst

Great. Great. That's really helpful color. And then, just one more.

Have you seen any changes to your book value so far in the second quarter?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Yeah. Given, again, the continued move in rates both on the belly of the curve and the 10-year, we project the book value to be down about 4% to 5% since the end of the quarter.

Michael Smyth -- Keefe, Bruyette and Woods -- Analyst

Great. Thanks for taking the questions.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Thanks, Mike.

Operator

Our next question comes from Trevor Cranston. Please state your question.

Trevor Cranston -- JMP Securities -- Analyst

Hey. Thanks. Good morning. You commented a little bit on the sort of repricing of loans given the move up in interest rates and the widening of credit spreads.

Could you maybe go through where you're seeing RPLs available for purchase in the market today in terms of price and yield and kind of where the ROE is on new investment today versus kind of what it was at the end of last year? Thanks.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Yeah. So the better part of last year, we were more focused on the liability side of our balance sheet, as again highlighted in the earnings remarks. In the first half of the year, last year, we actually didn't buy much in new loans, but we were able to optimize the deals we had issued in prior years to lock in the lower rate financing. In the second half of the year, we had more success in acquiring loans.

But given the all-in low level of yields -- loan yields, whether it be season reperforming, non-QM prime jumbo, we're trading on a spread basis to swaps plus mid-100s. That number has widened out to maybe swaps plus 200. But the increase in all-in rates has produced yields that are probably running mid high 4s on loans today. Like I said that effect isn't lost on the securitization market.

So the demand to execute a securitization has also increased. And based on where you could sell the top of the capital structure, you're looking at retained pieces yielding probably low double digits at the moment.

Trevor Cranston -- JMP Securities -- Analyst

OK. Got it. That's helpful.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

The last thing I will say –

Trevor Cranston -- JMP Securities -- Analyst

In terms of – oh, go ahead.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Sorry. Let me just make one last comment. The loan market, at least on the season reperforming side is this is not something that's being produced that already exists. On average, these loans are 100- to 160-month season, depending on what comes out for sale.

So the controlled nature of that flow has protected sort of the spread widening that's occurred in some of the other newer origination products. Yesterday, Fannie Mae had their second loan sale of the year. And based on early color, it seems to have traded well, and in line with the spreads I just mentioned to you.

Trevor Cranston -- JMP Securities -- Analyst

OK. Got it. That's good color. In terms of the book value change, could you kind of roughly talk about how much of that was driven kind of by the movement in rates versus the movement in credit spreads.

And if there's any sort of net duration exposure on the portfolio at this point?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Sure. So a lot of the book value movement is a function of rates. Like I said, the belly of the curve moved about 165 to 170 basis points from December to March. The 10-year itself moved over 80-plus basis points over the same time frame.

So that led to a large movement in our book value. From a credit perspective, spreads were wider in sympathy with what happened to agencies. So that, I would say, was 25% change -- reduction in book value, 75% of the change was driven by the rate movement. As we sort of move past quarter end, rates have continued to sell off.

And both the 10-year and the five-year have moved almost, I think, 35% of the move they occurred in Q1 on the five-year and almost 70% of the move that occurred in the 10-year, so far has been experienced in April, and which is why, again, book value is down anywhere between 4% to 5% since the end of the quarter. But yesterday with the Fed announcement, I think, has given a little bit more clarity on what the Fed's going to do. There was a lot of chatter around a potential 75 basis point hike, but Powell has sort of taken that off the table, predicts that there could be one or two, possibly three, more 50-basis-point hikes and then they will see what the data shows in terms of inflation expectations. So I think that's provided a little bit more certainty on the rate outlook as we sort of move into the back half of the year here.

Trevor Cranston -- JMP Securities -- Analyst

Got it. Appreciate the comments. Thank you.

Operator

[Operator instructions] Our next question comes from Doug Harter. Please state your question.

Doug Harter -- Credit Suisse -- Analyst

In the past, and you've done a good job of calling and reissuing securitizations to improve your liability structure. Obviously, the cost of that has gone up. But can you just talk about the potential to still do that and get the releverage benefit? Or if there are other ways to kind of relever those securitizations?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

That's a good question. And we highlighted in our Q4 earnings call that we do have a fair amount of deals that are either callable or will become callable in the calendar year 2022, and there's a page in our supplement that reflects that. As you mentioned, the cost of issuing new debt has increased quite significantly from Q4 to today. But as we evaluate the equity takeout from the deals and redeploying that today relative to issuing new debt, we're continuously monitoring that.

And as it stands today, that's not that attractive to do. The additional new debt that would be issued would be almost negative to where you could deploy the equity, even if we were to repurchase that in stock. So we will continue to evaluate that over the course of the year. But another way to think about it is each month that those deals remain outstanding and they pay down and they continue to delever as an additional dollar of equity, we'll be able to take out in the future once we do call those deals.

So it is a source of liquidity for the company on a go-forward basis.

Doug Harter -- Credit Suisse -- Analyst

I mean, I guess, would there be ability to put leverage against that additional equity that's building without having to redo the whole securitization and give up the attractive cost of funds?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Yes. I mean as the subordinate notes that we retain of the securitizations continue to delever our repo financing counterparties would take that into account and we could optimize the higher value of those assets over time in the form of additional borrowings on repo. That would be another way to sort of tap into that equity.

Doug Harter -- Credit Suisse -- Analyst

Got it. And I guess that market has kind of had ebbs and flows. I guess how would you characterize the market there and your level of comfort kind of given the volatility of that financing?

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Yes. I mean, and I think if you look at the overall repo market for Q1, given the large rate move, given the geopolitical events going on, the market has actually performed really well. And especially, as I mentioned, with yesterday's Fed announcement has given a little bit more clarity on potential future rate path. We don't necessarily see an issue there today.

But again, based on the liquidity that we have in the company and our current cash needs, I mean to the extent we are comfortable and we find attractive opportunities, we will increase our leverage and put more stuff on repo. And one of the things we touched upon, we are very cognizant of the type of financing we're getting. We would prefer non-mark-to-market and longer tenure, but we want to weigh that against the cost of that type of financing relative to the investment opportunities. But we're pretty comfortable overall with where the repo market is today and the counterparties that we're dealing with.

Doug Harter -- Credit Suisse -- Analyst

Great. Thank you.

Operator

[Operator instructions] OK. And it doesn't look like we have any further incoming questions. So I'll turn the call back over to Mohit for closing remarks.

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Thanks, operator, and thank you, everyone, for joining us today, and we look forward to speaking to you on our Q2 earnings call.

Operator

[Operator signoff]

Duration: 24 minutes

Call participants:

Victor Falvo -- Head of Capital Markets

Mohit Marria -- Chief Executive Officer and Chief Investment Officer

Subramaniam Viswanathan -- Chief Financial Officer

Michael Smyth -- Keefe, Bruyette and Woods -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

Doug Harter -- Credit Suisse -- Analyst

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