Chimera Investment Corp (NYSE:CIM) Q4 2021 Earnings Conference Call February 17, 2022 8:30 AM ET
Victor Falvo – Head, Capital Markets
Mohit Marria – CEO, CIO & Director
Subramaniam Viswanathan – CFO
Conference Call Participants
Michael Smyth – KBW
Eric Hagen – BTIG
Kenneth Lee – RBC Capital Markets
Trevor Cranston – JMP Securities
Douglas Harter – Crédit Suisse
Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation Fourth Quarter and Full Year 2021 Earnings Conference Call. [Operator Instructions].
It is now my pleasure to turn the floor over to Victor Falvo, Head of Capital Markets.
Thank you, Ashley, and thank you, everyone, for participating in Chimera’s Fourth Quarter and Full Year 2021 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.
Thank you, Vic, and good morning, and welcome to the Fourth Quarter and Full Year 2021 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 up for questions.
Low interest rates throughout most of 2021, combined with strong investor demand for high-quality fixed income assets allowed Chimera to optimize its liability structure, which we believe will benefit our shareholders over the long term. Securitization of mortgage assets is at the core of our company’s DNA and is paramount to Chimera’s market differentiation amongst its peers. Through innovative structuring techniques, we have consistently demonstrated our ability to efficiently manage our portfolio’s asset and liability risk while maintaining low recourse leverage and attractive net interest spreads. The reperforming loans we purchased in the period from 2016 to 2018 have generated portfolio yields that have exceeded our original expectations. Our resecuritization activity in 2021 enabled us to refinance the debt on these loans with a interest expense as well as release equity from the original purchases.
For the full year 2021, we refinanced 13 of our previously issued reperforming deals, with 8 new securitizations on $6 billion of mortgage loans.
Higher advance rates achieved through Chimera’s resecuritization activity in 2021 freed up more than $900 million of capital and helped us accomplish many objectives towards the strengthening of our balance sheet.
Lower interest expense and higher advance rates on our 2021 securitizations have provided a great benefit to our asset and liability structure. It positively impacted the returns on our newly retained investments and allowed us to further shift financing from recourse to nonrecourse, a clear enhancement for the long term.
The results of our work in 2021 helped reduce the amount of recourse financing on our credit assets by over $800 million, while significantly lowering the interest expense on our credit-related repo.
In addition, we successfully paid off $400 million high-cost debt plus the associated warrants and extinguished the remaining $50 million of convertible debt.
Overall, securitized debt represents 70% of our total financing, up from 65% in 2020. Our cost of securitized debt was 2.40% at year-end, a 120 basis point reduction from 2020.
98% of our securitized debt has a fixed rate coupon, which is important as interest rates have begun to rise. The fixed rate accreted on our deals helped to lock in a wide net interest spread and our securitized assets for a long period of time.
Most of our securitizations are structured with explicit call dates. We called 13 deals in 2021 and have 14 deals callable in 2022. And our entire stack of securitized debt has a weighted average time to call of 3 years. These call days provide opportunities to frequently optimize our funding structure, which has proven to be immensely beneficial.
Now I would like to take you through our asset purchases and fourth quarter securitization activity. In the fourth quarter, we purchased $540 million of reperforming loans. We closed on $100 million of the loans in December and expect $440 million of these loans to close in the first quarter of 2022.
For the full year 2021, we purchased over $3.2 billion in loans, consisting of $1.3 billion in reperforming loans, $320 million of business purpose loans, $1.2 billion in prime jumbo loans, and $435 million of agency-eligible investor loans.
For securitization activity in October, we securitized 354 million CIM 2021-R6 with reperforming loans from our loan warehouse. We sold 336 million in notes, representing a 95% advance rate, the highest advance rate we have achieved on reperforming loans to date. The average cost of debt for the R6 deal is 1.53%. Chimera retained an $18 million investment in subordinate notes and interest-only securities. The R6 deal was rated by Fitch and DBRS and will be callable beginning September of 2026.
In November, we completed our 14th and final securitization of the year. 168 million CIM 2021-R4 with nonperforming loans from our warehouse. We sold 126 million senior securities, representing 75% of the capital structure. We retained 42 million in subordinate notes for investment. 2021 was the most active year for securitization in Chimera’s history. In total, Chimera sponsored $8 billion in 14 separate securitized deals, 6 reperforming loan securitizations; 4 nonperforming loan securitizations; 3 prime jumbo securitizations and 1 agency-eligible investor loan securitization. The reperforming and nonperforming deals have been consolidated on our balance sheet. The prime jumbo and the agency-eligible loans are not consolidated on our balance sheet.
As we begin 2022, we are well-positioned for the current market environment with higher rates and wider spreads. Our balance sheet is strong with 95% of the capital allocated to residential mortgage credit. 70% of our financing is securitized debt, which we believe provides optimal long-term nonrecourse financing for our loan portfolio. Our net interest spread is strong, largely resulting from the reduction in financing cost this past year, and our leverage is at historically low levels. We have accomplished a lot this year. Our securitization business remains strong. We have ample cash on hand to grow the portfolio. And as we embark on 2022, we’re set to continue to deliver the best risk-adjusted dividends to our shareholders.
I will now turn the call over to Subra to review the financial results.
Thank you, Mohit. I will review Chimera’s financial highlights for the fourth quarter and full year 2021. GAAP book value at the end of the quarter was $11.84 per share, and our economic return on book value was negative 1.2% based on quarterly change in book value and the fourth quarter dividend per common share.
Our economic return for the full year was 6.2%. GAAP net loss for the fourth quarter was $718,000 or 0 per share and GAAP net income for the full year was $596 million or $2.44 per share.
On an earnings available for distribution basis, net income for the fourth quarter was $111 million or $0.46 per share and $429 million or $1.78 per share for the full year. For onetime nonrecurring items, we had approximately $0.08 of income that was derived from securities called during the quarter and $0.26 of income that was derived from securities called over the full year. While this may occur from time to time, we don’t expect this level of income every quarter. And in some quarters, we could have a loss related to interest-only securities that are called. We will provide details on this income whenever it becomes material to our earnings available for distribution.
Our economic net interest income for the fourth quarter was $155 million and $630 million for the full year. For the fourth quarter, the yield on average interest-earning assets was 6.4%. Our average cost of funds was 2.3%, and our net interest spread was 4.1%. Total leverage for the fourth quarter was 3:1 while recourse leverage ended the quarter at 0.9:1. For the year, our economic net interest return on equity was 16.5%, and our GAAP return on average equity was 18.1%. And lastly, our full year 2021 expenses, excluding servicing fees and transaction expenses, were $69.1 million, in line with previous year.
That concludes our remarks. We will now open the call for questions.
[Operator Instructions]. And we will take our first question from Bose George with KBW.
This is actually Mike Smyth on for Bose. My first question, in your prepared remarks, you mentioned your most recent RPL deal with the 95% advance rate. Just wondering what’s the all-in ROE on that deal? And then would you ever hold any repo against that as well? Or do you get a high enough unlevered ROE on the supportive fees?
Mike, this is Mohit. The question as it relates to the 2021-R6 deal, as mentioned in the opening remarks, we did hold an $18 million investment, plus the derivatives that were created. And the returns on the sub stack and the IOs will produce very high single digits, low double-digit deals, depending on the type of financing that we could get on the sub stack, we could potentially repo it. But at the moment, it’s held for cash. As we’ve highlighted on previous calls, the composition of the financing on the retained pieces. We would prefer non-mark-to-market than longer tenure. So if that becomes available and seems attractive, we could potentially add that in the future.
That’s helpful color. And we have heard that volatility has picked up a bit in the securitization markets over the last few weeks. Just curious to hear your thoughts on that and how long you expect any volatility to persist for?
Yes. I mean we have seen an uptick before, and we thought typically the January effect of bringing buyers it has, but the amount of deal flow has definitely been elevated. A lot of the volatility is on the prime jumbo and the non-QM side. The season reperforming securitizations are few and far between even in the last year outside of us and a handful of other issuers.
So again, I think the rate volatility, the backdrop of what’s happening, macro event has led to buyers being more selective. And I think the large amount of deal volume in the first 6 weeks has also put a lot of pressure on spreads in the near term. But we think it will stabilize with housing still remaining strong and yields on these assets on these new deals that you couldn’t get a year ago, still is an attractive place to park money. So we’re still optimistic. As mentioned in the opening remarks, we have 14 deals that are callable over the year, and we will see how the market is as we sort of take advantage of that as we did last year.
Great. That’s helpful. And then just one more for me. Have — I guess as a follow-up. Have you seen any changes in loan prices to reflect the wider spreads in the securitization market?
The loan pricing has been more sticky than where execution is occurring in the new issue space. But again, I think with just the backup in rates, the translation on the new issue side, whether it be prime jumbo, agency-eligible investor or non-QM, we felt more of a spread widening there on the loan front. Again this RPL space, the main sellers there remain the GSEs. There are some funds that we’ll liquidate, and what we’ve seen so far this year, pricing is marginally wider but not significantly wider unlike the prime jumbo and non-QM space.
And we’ll take our next question from Eric Hagen with BTIG.
Maybe a couple for me. For the $108 million in unrealized losses for the period, can you give some color on where those marks were concentrated? And then you obviously mentioned the callable securitized debt, which remains a focal point of the portfolio. Can you talk about how you guys think about the trade-off between potentially higher funding costs as those deals come up for call and the ability to get more leverage and restructure your advance rate and such?
Sure, Eric. I’ll start with the second part of the question, and Subra can give some color on the first part as it relates to the unrealized losses due to fair value changes.
The balance between — or the economics, I should say, looking at calling a deal versus not calling a deal are twofold, and you highlighted the two things. One is if there’s a reduction in the all-in financing cost; and two, if the structural leverage is not optimal and we could optimize it via the call and take out some equity as — those are the two things we look at any time we make a call. For the calendar year 2021, we had the benefit of being able to do both, reduced financing costs quite significantly while also achieving a higher advance rate leading to an equity lease of over $900 million. If you look at the deals that are in the supplement on the last page, the 14 deals have delivered quite substantially. So no doubt based on the strong securitization market, strong housing and strong credit performance of those deals. We should be able to attain a similar advance rate as we did on the securitizations we did in 2021. So that’s the first factor.
And given the time frame in which those deals were executed, if you go back to 2018, ’19, the rates were obviously higher than they are today. So in some cases, you may still have a cost savings. But being able to take out equity in a rising rate environment with wider spreads should still give us the ability to take advantage of redeploying new capital into new assets.
So hopefully, that answers your question there. As far as the fair value, I’ll let Subra touch upon that on the breakdown of that.
Thanks, Mohit. On the securitized loans, we saw about 92 basis points of reduction or unrealized losses. The non-AC senior debt — the non-AC senior securities positions, we saw about 2.34% drop. And on the securitized debt, which was our liabilities, we saw 114% — a 114 basis point drop. So that’s the breakout.
A lot of our legacy assets are obviously rolled down the curve quite significantly and the move in rates in Q4 was more front-end loaded. The tenure was effectively flat quarter-over-quarter. So that change in rates is what led to some of our legacy assets pricing going down for the quarter, Eric.
That’s helpful. That’s helpful. And then on the securitized debt that is up for call this year, can you say what the fixed rate coupon is on the debt that is potentially rolling over?
I don’t have that number here in front of me, but we could get that number for you guys. I think it should be in the financials. I just don’t have that here in front of me.
We have our next question from Kenneth Lee with RBC Capital Markets.
You touched upon this briefly, but just wondering if you can just further elaborate about your expectations around expected returns on the retained tranches for any of the resi mortgage loans in the current environment?
Sure. Ken, as it relates to 2021, the levered returns on what we created are very high single digits to low double digits on a — just a loss-adjusted basis and implying some leverage depending on the format comes in, those returns could be high double digits, between 17% to 18%, depending on, again, the leverage you embed on those.
As we look forward, obviously, there’s been some more volatility in the new issue market. I guess, primarily on the prime jumbo and non-QM side. But that should also put pressure on loan pricing, although it hasn’t been reflected yet, but we think those two things should move in tandem and your returns on retained pieces even this year should produce pretty attractive risk-adjusted returns in the same context as last year.
Got you. Very helpful. And then one follow-up, if I may. Just given the current environment and obviously, the macro backdrop how would you characterize your current investment stance? Or in other words, do you expect leverage to sort of like remain at the same levels or could you get a little bit more on the offense going forward as pricing gets a little bit more attractive potentially?
That’s a good question, Ken. Thank you. As we’ve highlighted on pretty much all of the calls last year, we played defense just with the uncertainty around what the Fed may do, the pandemic and how long that will go on for. And have had still a very successful year in accomplishing and buying $3.2 billion of loans, which are accretive to the portfolio.
As we sit here with 0.9 turns of recourse leverage and ample liquidity at our disposal, we actually want to take off — take the offensive here, whether it be on the agency side, given the spread widening and more clarity from the Fed unwinding paring down their activity. What’s happening in the new issue market, which should lead to some widening on loan spreads. So I think we are actually very well-positioned to take advantage of all of those investment opportunities that may become available. And I think we will look to take leverage up from where we are at 0.9% higher and take advantage and grow the portfolio here.
We’ll take our next question from Trevor Cranston with JMP Securities.
You guys mentioned the sort of change in pricing you’ve seen in the — primarily in the prime jumbo and the non-QM spaces in 4Q and in the first quarter. Can you also talk about any changes you’ve seen in terms of the supply of loan products available for sale with the uptick in volatility in the first quarter and how you expect that piece to play out over the course of the year?
Sure, Trevor. I’ll take this one. As far as the prime jumbo and non-QM stuff goes, I think from an originator standpoint, we are going to see more activity there just for them to continue churning, if you will, their origination channels and this infrastructure they have built. So I think we will have ample opportunity to buy as much as we want of that product. I don’t think — to the extent the economics return to make sense, we will sort of grow that. We did a total of 4 securitizations on new issue collateral, 3 jumbo and 1 agency-eligible investor.
On the RPL side, I guess a lot of that flow is primarily coming from the GSEs. They target anywhere between $12 billion to $18 billion of loan sales a year. We will see what their calendar looks like for 2022. We did get the first announcement from Fannie last week about their upcoming sales. So we think, again, that supply will be more controlled by the GSEs, and we’ll keep that market, at least from a spread perspective, more controlled than some of the other markets, which are just bringing deals to the market to mitigate some of the rate risk and how much the rates have moved in the first 6 weeks of this year.
Got it. Okay. That’s helpful. And then given the magnitude of the move in rates and some credit spread widening we’ve seen in the first quarter, do you guys have an estimate as to how your book values moved since the end of the year?
Sure. I think our approximate change in book value since the start of the year is around 2.5%.
So up 2.5%, just to be clear.
Down 2.5%, I’m sorry.
We’ll go next to Doug Harter with Credit Suisse.
Just, Mohit, as you’re looking at the opportunity set, can you just talk about the relative attractiveness of legacy versus new production versus agency? And how — as you look to get a little bit more offensive as you said, kind of how you would look to allocate across those opportunity sets?
Sure, Doug. I’m assuming when you say legacy, you mean legacy loans, not necessarily legacy securities. So on the loan front, I think, again, given the rate environment we’re in, Convex is going to play a bigger role this year than in prior years. So having 170-month season loans and knowing how those loans are going to prepay and behave is going to be a lot more telling. That remains a big focus for us. We were successful in adding $1.2 billion of those loans last year. We’re hopeful from the GSEs this year that we’ll have more success as far as new originations go.
I think the volatility will create opportunities for us to add loans there as well. But a lot of that will be subject to where the securitization exits are on those loan purchases and what the retained pieces look like. So as we’ve always done, that will drive our decisions on the way we sort of commit capital. And obviously, some of the low-level adjustments that the GSEs have made at the start of this year should also lead to a larger private label exit for some of these originators. But we just need the market to stabilize on the new issue side, on the securitization side for that — for us to be able to take advantage of that.
And if you look at more broadly the agency space where we really haven’t had any agencies since March of 2020, we’ve seen a 25 to 30 basis point widening of the basis so far since the Fed announcement. We think those could widen out a little bit more. But again, as we look at it, the all-in yields that are attainable today are probably at the levels last seen in 2019.
So we do think it does make relative value sense to deploy some capital there over the course of this year, and we’ll be patient in sort of taking advantage of those opportunities.
And there are no further questions at this time. I will now turn the call back over to Mohit for any closing remarks.
Thank you, Ashley, and thanks, everyone, for joining us today. We look forward to speaking to you on our Q1 call.
Thank you. And this does conclude today’s program. Thank you for your participation. You may disconnect at any time.