Chimera Investment Corporation (NYSE:CIM) Q3 2023 Earnings Call Transcript

Chimera Investment Corporation (NYSE:CIM) Q3 2023 Earnings Call Transcript November 2, 2023

Chimera Investment Corporation beats earnings expectations. Reported EPS is $0.13, expectations were $0.12.

Operator: Greetings. Welcome to the Chimera Investment Corporation Third Quarter 2023 Earnings Call. [Operator Instructions]. At this time, I would like to hand the call over to Victor Falvo, Head of Capital Markets. Thank you. You may begin.

Victor Falvo: Thank you, operator, and thank you, everyone, for participating in Chimera’s Third 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 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 call over to our Chief Executive Officer, Phil Kardis.

Phillip Kardis: Good morning, and welcome to the Third Quarter 2023 Earnings Call for Chimera Investment Corporation. Joining me on the call are Choudhary Yarlagadda, our President, Chief Operating Officer and Co-CIO; Subra Viswanathan, our Chief Financial Officer; Dan Thakkar, our Co-CIO; 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. I’d like to start by welcoming 2 new members to the Chimera team. Susan Mills has been elected to our Board of Directors effective November 13. She recently joined Academy Securities, a veteran-owned investment bank. Before that, she spent 36 years at Citibank, where she held various senior management positions and businesses related to North American residential mortgages.

She brings a wealth of expertise and experience in the residential mortgage market, and we’re very excited to have her as part of the team. Also, Miyun Sung is joining us next week as our Chief Legal Officer. She has over 23 years of legal experience both as external counsel and in-house. She has spent the last 7-plus years as Senior Vice President, Chief Legal Officer and Secretary of Urstadt Biddle Properties Inc., a New York Stock Exchange listed equity REIT. We’re excited to have her join the team. During the third quarter, the fixed income market experienced both increased volatility and higher rates. In July, as expected, the Federal Reserve increased its Fed funds target rate by 25 basis points. And while the Fed paused their rate hikes at the September meeting, they did reduce the projected rate cuts in 2024 by half or 50 basis points.

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Q&A Session

The resulting back up on the long end of the yield curve caused the 10-year treasury rate to increase 73 basis points over the course of the quarter to 4.57%. The 10-year yield continued its climb after quarter end and briefly reached 5% in mid-October. These higher interest rates have moderately reduced the value of our portfolio. We saw our GAAP book value per share drop quarter-over-quarter from $7.29 to $6.90, a decrease of 5.4%. Considering the market conditions, we remain cautious and mostly on the sidelines, which left our investment portfolio relatively unchanged during the quarter. We did, however, continue to focus on liquidity and liability management. This quarter, we added 3 new repo counterparties. And post quarter, we refinanced a high fixed rate non-mark-to-market facility into a new 2-year limited mark-to-market facility.

We expect this facility will save us approximately $16 million in interest expense over the next 12 months. What is our outlook? Looking ahead to the fourth quarter and into 2024, we are planning for rates to remain high. While inflation has moderated since last year, it remains much higher than the Fed’s 2% target. And although it appears the Fed is nearing the end of its hiking cycle, recent data appears to support another rate hike. The U.S. labor market remains strong. Third quarter GDP increased to nearly 5%, and consumer spending increased more than expected in September. In addition to the Fed funds rate remaining elevated in 2024, we note the relatively quick escalation of long-term rates, driven by several factors, including the strength of the economy and the Fed pushing out rate cuts.

Also, the growth of the federal deficit and associated interest cost, coupled with concerns about participation by China and Japan and treasury auctions and the Fed effectively engaged in quantitative tightening, have created supply imbalances, which have helped push long-term — excuse me, supply and demand imbalances, which have helped push long-term rates higher and we believe for longer. In fact, the sustained move in the 10-year treasury yields above 5% cannot be ruled out. Home sales are on pace for the slowest year since the great financial crisis, elevated home prices, constrained housing inventory and high mortgage rates have created a trifecta of headwinds perpetuating the housing affordability crisis. Apart from the data-driven volatility, there is also a rising risk of government shutdown and an escalation of the war in the Middle East that can further exasperate volatility in the capital markets.

So what’s our strategy? We continue to manage our business with the belief that interest rates, both short and long term, will be higher for longer. Our focus remains on strengthening our balance sheet and managing our liabilities. To help reduce various risks associated with recourse financing, we frequently seek longer-dated maturities, obtain non or limited mark-to-market terms and utilize financial derivatives such as swaptions and futures contracts to soften the impact of rising rates. Through these initiatives during the first 9 months of 2023, we have reduced our recourse financing by more than $800 million. We have non or limited mark-to-market financing on 57% of our outstanding recourse financing. We have hedged $1 billion or roughly half of our floating rate financings with a weighted average swap rate of 3.26%.

And we have $1.5 billion in swaptions, which give the company the option to pay a fixed rate of 3.56% for 1 year beginning in the second quarter of 2024. Even in this higher rate environment, our assets continue to perform well. Our interest income quarter-over-quarter and year-over-year is relatively unchanged. Credit performance on our portfolio has been better than our original investment expectations. We believe our portfolio is unique. Most of our securitizations are backed by approximately $11 billion of re-performing loans with low LTVs and an average seasoning of 17 years, which we expect will continue to perform well over a range of economic conditions. Our securitizations continue to delever. And depending on future interest rates, we will be able to terminate and take out cash when appropriate.