Chimera Investment Corporation (CIM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Chimera Investment Second Quarter 2023 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.

Thank you, operator, and thank you, everyone, for participating in Chimera's Second Quarter 2023 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 investor presentation 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 Chief Executive Officer, Phil Kardis.

Thank you, Vic. Good morning, and welcome to the Chimera Investment Corporation's Second Quarter 2023 Earnings Call. Joining me on the call are Choudhary Yarlagadda, our President and Co-Chief Investment Officer; Dan Thakkar, our Co-Chief Investment 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'll open the call for questions. We continue to be active during the second quarter through securitizations, stock repurchase and liability management. We completed 5 securitizations during the second quarter, totaling nearly $1.4 billion. Let me describe our quarterly securitization activity at a high level. In April, we sponsored CIM 2023-I1, a rated securitization of non-QM investor loans totaling approximately $236 million. Approximately 87% of the capital structure was sold in a private placement to institutional investors. We retained a subordinate interest in securities with an aggregate principal balance of approximately $31 million and certain interest-only securities. Our average cost of debt of this securitization is 6.6%. We retain an option to call the securitized mortgage loans at any time beginning in April of 2026. In May, we sponsored CIM 2023-R4, a rated securitization of seasoned reperforming residential mortgage loans totaling $394 million. We sold approximately 75% of the capital structure in a private placement to institutional investors. Chimera retained subordinate interest in securities with an aggregate principal balance of approximately $97 million and certain interest-only securities. Our average cost of debt of this securitization is 5.4%, and we retained an option to call the securitized mortgage loans at any time beginning in April of 2028. In June, we sponsored CIM 2023-I2, our second rated securitization of non-QM investor loans this year totaling approximately $239 million. Approximately 85% of the capital structure was sold in a private placement to institutional investors. We retained interest and securities with an aggregate principal balance of approximately $36 million and certain interest-only securities. Our average cost of debt of this securitization is 7%. We retain an option to call the securitized mortgage loans at any time beginning in July 2026. We expect double-digit returns on the retained securities for these 3 securitizations. And now regarding re-securitization, we terminated 2 existing trusts, CIM 2017-7 and CMLTI 2019-E. In addition to the loans from these 2 deals, Chimera added approximately 104 million loans from our warehouse facility. We then issued CIM Trust 2023-R3 and CIM Trust 2023-NR2. These re-securitizations allowed us to: one, avoid a step-up rate increase on the senior debt of 1 of these terminated trusts; two, convert short-term repo funding into long-term nonrecourse fixed rate financing; and three, to recapture approximately $43 million in cash from the terminated trust. Primarily as a result of our securitization activity this quarter, we reduced our recourse financing, primarily loan warehouse facilities, by more than $500 million. And in total, through the first half of the year, we reduced our recourse financing by approximately $750 million. The short-term rates continue to increase this quarter. We prepared for a higher for longer rate environment. We added an additional $500 million one-by-one swaption, bringing our total swaption position to $1.5 billion with an average pay fixed interest rate of 3.56%. These swaptions give us optionality to hedge our NIM if rates remain elevated through 2024 and into mid-2025. In addition, our Board reauthorized our stock buyback plan and increased it to $250 million in the middle of June. Thereafter, we were able to repurchase more than 5.8 million shares for approximately $33 million at an average price of $5.66. The share repurchase was accretive to our shareholders. Our book value per share decreased by $0.12 or 1.6% quarter-over-quarter. The net change in book value plus dividends paid on our common shares resulted in an 80 basis point total economic return for the quarter and a 2.8% total economic return for the first half of 2023. Looking ahead, while we believe it is likely the Fed will raise rates 1 more time this year, we believe the rate hike cycle is nearing an end. Inflation is coming down slowly, while the economy and job market remains strong. The Fed's own staff no longer predicts a recession in 2023, and the Fed may well engineer a soft landing. We're also buoyed by the residential -- by residential credit, which performed strongly during the quarter, as well as by the strength of the housing market in spite of affordability issues. What does that mean for us? As we've discussed in the past, our portfolio continues to perform well. Our EAD challenges are primarily related to our cost of financing, not the credit quality of our portfolio. Once rates moderate and begin their decline, our portfolio is positioned to benefit. We expect that this rate moderation and stability will allow us to refinance some of our more expensive financings, which will be positive to our earnings. On the other hand, to the extent that rates stay elevated for longer, we have $1.5 billion in swaptions, which we can exercise to support our interest margins into 2025. We continue to see interesting investment opportunities, and we think, with the proposed bank capital regulations, that additional investment opportunities will arise over the second half of 2023. We will continue to evaluate those opportunities along with our stock price relative to our book value with respect to continued stock repurchases. We have a number of tools in our toolkit, from reducing our financing costs to repurchasing our stock to making accretive investments to drive shareholder value. We remain optimistic about our future. I would now like to turn to Subra to give a more detailed overview of our financial results.

Thank you, Phil. I will review Chimera's financial highlights for the second quarter 2023. GAAP book value at the end of second quarter was $7.29 per share, and our economic return on GAAP book value was 80 basis points based on the quarterly change in book value and the second quarter dividend per common share. And for first half of the year, our economic return was 2.8%. GAAP net income for the second quarter was $18 million or $0.08 per share. On an earnings available for distribution basis, net income in the second quarter of approximately $28 million or $0.12 per diluted common share. Our economic net interest income for the second quarter was $67 million. For the second quarter, the yield on average interest-earning assets was 5.6%, our average cost of funds was 4.4%, and our net interest spread was 1.2%. Total leverage for the second quarter was 4.2:1, while recourse leverage ended the quarter at 1.0:1. For financing and liquidity, the company had $670 million total cash and unencumbered assets at quarter end. We had $1.5 billion of either non or limited mark-to-market features on our outstanding repo agreements. We had $2 billion floating rate exposure on our outstanding repo liabilities. We had $1 billion pay fixed 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 1 year, beginning in the second quarter of 2024, at an average rate of 3.56% as a hedge position for liabilities. For the quarter, our economic net interest income return on equity was 10.2%, and our GAAP return on average equity was 5.5%. And lastly, our second quarter 2023 expenses, excluding servicing fees and transaction expenses, were $14 million, modestly lower from the first quarter. That concludes our remarks. We will now open the call for questions.

We will now conduct the question-and-answer session. [Operator Instructions] Your first question comes from George Bose (sic) [ Bose George ] of KBW.

This is Bose. Actually, I had a couple of questions. First on the expenses, it did come down this quarter. Can you just sort of talk about the outlook for expenses going forward?

We expect the expenses to remain constant. Obviously, some of the -- variable expenses such as servicing fees and transaction expenses would vary, depending on if we increase the number of loans. But as pay down happens, some of these variable expenses will continue to go down. But otherwise, our G&A expenses, we expect it to be pretty benign or pretty consistent as we have.

Okay. Great. And then just in terms of the current returns, so you show that economic ROE, I think, it was 10.2%. How does that compare to the incremental ROEs that you're getting on stuff, that loans you're buying and securitizing currently?

So -- okay. So I just want to make sure. So what we project right now, the 10.2%. Our scenarios, we expect our top line interest income to stay consistent with what we have. Expenses, really, it depends on where the rate is. If we expect an additional 25 basis point increase in interest expense, so that will somewhat offset some of that. But what we focus right now is to have a consistent economic return based on our net income or our interest income being -- projecting to be consistent across quarters.

And so when I take that number and sort of the expenses, run rate expenses as a percentage of equity, I mean for you guys to get to kind of a double-digit ROE on a net basis, does it require like either more scale or rates to come down? Or what kind of scenarios -- like how do you get from here to sort of that run rate double-digit net ROE?

This is Phil. That's correct. I mean we -- as we look for accretive investments, we'll have to -- we need to increase our size, and we'll need some rates to come down as well. Both.

Your next question comes from Doug Harter of Credit Suisse.

Can you talk about the decision on the dividend, and in light of kind of where earnings are and kind of the expectation?

So -- sorry, you broke up a little bit. I think you were asking about the dividend? Hello?

Yes. Sorry. I think I cut out there for a second. So just -- sorry, just repeat. Can you talk about the Board's decision around the dividend in light of where current earnings are, and your expectations around kind of getting back to covering the new dividend?

Yes. So as we've said in the past, the EAD is 1 of the metrics the Board looks at. It's a useful guide. It is exact in terms of what our dividend paying capacity is, and we look at what that capacity is. We look at kind of, as we mentioned, looking forward into the future. As rates are moderating, we believe we'll be able to refinance some of our more expensive financings which will help us on our earnings, and so we think there are opportunities to continue to grow into that by the same token. Right now, what portfolio is generating, the Board feels comfortable at paying that dividend.

[Operator Instructions] Your next question comes from Trevor Cranston with JMP.

Can you elaborate a little bit on the type of opportunities that you think could emerge coming out of the banks as a result of the capital requirement changes? And what you think the timing of opportunities emerging there could be over the second half of the year?

Sure. We'll turn this over to Dan, who can address that.

Yes. So Trevor, so as you said, there is a strong likelihood that mortgage banks will have to work more capital against residential mortgage pools, so this should push more residential mortgage origination to nonbank originators and result in more private label securitization. We will see those opportunities in the future, as you said. One thing I will say that even without that, we have been shown large inventories of discounted underwater mortgages, given the consolidation going on in the banking space. At this point, the opportunity that we are seeing is primarily in the prime jumbo, low LTV kind of paper.

At this time, there are no questions. I'd like to turn the call back over to management for any closing remarks.

This is Phil Kardis. Thank you for participating in Chimera Investment Corporation's second quarter earnings call, and we look forward to discussing our third quarter earnings call in November. Thank you.

Thank you, everyone, for attending the Chimera earnings call. That does conclude today's call. Have a wonderful rest of your day.