Q4 2023 Chimera Investment Corp Earnings Call
Participants
Victor Falvo
Phil Kardis
Subra Viswanathan
Bose George
Trevor Cranston
Stephen Laws
Eric Hagen
Presentation
Operator
Yes, hello, and welcome to the Chimera Investment Corporation Fourth Quarter and Full Year 2023 earnings call and webcast. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to turn the call over to Victor Falvo, Head of Capital Markets and Investor Relations. Please go ahead.
Victor Falvo
Thank you, operator, and thank you, everyone, for participating in Chimera's Fourth Quarter and Full Year 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 contents 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.
Phil Kardis
Good morning, and welcome to Chimera Investment Corporation's Fourth Quarter and Full Year 2023 earnings call. Joining me on the call are Choudhary Yarlagadda, our President, Chief Operating Officer; and Co-Chief Investment Officer; and Subra Viswanathan, our Chief Financial Officer; and Vic Falvo, our Head of Capital Markets and Investor Relations. After my remarks, Sue will review the financial results and then we'll open the call for questions.
Let me begin by recognizing drogerie Legato who announced his retirement, see why he is affectionately known has been here since the beginning. He has been involved in all aspects of our business from structuring our securitizations and unique financing to managing our operations and information technology groups. These are some big shoes to fill, and I'm confident with CY. ASSISTANT our transition will be seamless. While we're saddened by his departure, we are happy for him as he begins the next stage of its journey, and we wish the Y. nothing but the best.
As I think back about last year, I'm reminded of Maxine Nightingale song get right back to where we started from when we ended 2022 10-year Treasury had a yield of 3.87%. And again, as we ended 2023, the 10-year had a yield of 3.88%. But as we got right back to where we started from. We took a very volatile circuitous route during the year. We saw the 10-year treasury yield dropped to 3.3% in early April and reached as high as nearly 5% in October before finishing the year at 3.88% Silicon Valley Bank and several other large regional banks failed and nearly sparked a full-fledged banking crisis. The Federal Reserve raised interest rates four times for a total of 100 basis points in the rate for 30-year mortgages reached a peak of 8% a level not seen since the year 2000 geopolitically. We saw the war in Ukraine continue on its system fee impact and a new conflict develop in the Middle East. Despite these adverse market conditions, we achieved some significant accomplishments throughout the year. We believe our portfolio performed well during the volatile environment as evidenced by interest income for 2023, essentially unchanged from 2022 at 773 million, and our credit metrics continued to be in line or better than originally expected. At acquisition, we reduced our total recourse financing by approximately 1 billion, and we refinanced 250 million of high-cost debt with a new facility providing considerable savings. We continued our business strategy of acquiring and securitizing mortgage loans. In total, for 2023, we purchased 1.4 billion of mortgage loans. 50% of the loans were seasoned reperforming loans, 33% with DSR investor loans and the remainder were business purpose loans. We securitized $841 million of the re-performing loans and $475 million. The DSCR we called six existing deals and issued four new deals totaling 1.2 billion, enabling us to recapture 133 million, and we raised approximately $74 million from ATM issuance and have begun deploying the capital into high coupon non-agency securities, which we purchased at a discount, generating low to mid 10s unlevered returns and committed to purchase approximately $150 million of business purpose loans with mid-teen levered returns.
What we see in 2024, we continue to follow the Fed mantra of higher for longer, especially as evidenced by recent statements by Chairman, Powell, the recent blow out of January employment numbers and yesterday's core CPI. of 3.9%, all of which support our views on higher for longer. We are hopeful for rate cuts by the summer, but we're planning for cuts later in the year, likely after the election with more cuts to come in 2025. We feel now is the opportunity Trinity to begin to scale in and acquire high yielding assets in front of the expected Fed cuts. As I mentioned, we have already begun adding assets. In addition, we have entered into forward contracts to acquire loans, and we expect to expand our forward purchases and flow arrangements in 2024. Additionally, with expected rate cuts by the end of the year, we may acquire loans now and hold them on warehouse facilities until securitization economics are more stable and provide better long-term returns for our portfolio.
Finally, as of December 2023, we had 14 outstanding securitizations that are callable and four more have become callable in 2024. The timing of exercising our option to call these securitizations depends on a variety of factors. As we as we have discussed in the past, I note that our nonrental deals present some nuances that are slightly different from most of our securitizations. For instance, generally, as the percentage of Remec eligible loans increases in those securitizations, economics of exercising the call improves with rate cuts in the not too distant future. I am optimistic about our future. We have a talented team and outstanding assets and a clear business.
I would now like to turn to Subrah to give a more detailed overview of our financial results.
Subra Viswanathan
Thank you, Phil. I will review Chimera's financial highlights for the fourth quarter and full year 2023 GAAP net income for the fourth quarter was 12 million or $0.05 per share, and GAAP net income for the full year was $52 million or $0.23 per share. Gaap book value. At the end of the fourth quarter, it was $6.75 per share. The reduction in value this quarter was mostly driven by a small realized loss on asset sales during the quarter, higher marks on two separate liability facilities and dilution from ATM issuance. For the fourth quarter, our economic return on GAAP book value was negative 58 basis points based on the quarterly change in book value and the fourth quarter dividend, our common share. And for the full year, our economic return was negative 53 basis points, which included $0.7 of dividends declared in 2023 on an earnings available for distribution basis, net income for the fourth quarter was 31 million or $0.13 per share and net income for the full year was 119 million or $0.51 per share. Our economic net interest income for the fourth quarter was 68,000,271 million dollars for the full year. For the fourth quarter, the yield on average interest earning assets was 5.9%. Our average cost of funds was 4.4% and our net interest spread was 1.5%. Total leverage for the fourth quarter was four to one, while recourse leverage ended the quarter at one to one for financing and liquidity. This quarter, we refinanced EUR250 million high-cost debt into a new facility, which will reduce the interest expense by more than 600 basis points. The Company had $599 million of total cash and unencumbered assets. At year-end, we had EUR1.7 billion floating rate exposure on our outstanding repo liability, we had $1 billion pay-fixed interest rate swap at a rate of 3.26% as a hedge position for our floating rate liabilities. These swaps mature in the second quarter of 2024, and we had 1.5 billion swaptions to pay fixed for one year beginning in the second quarter of 2024 at a weighted average strike rate of 3.56%. As a hedge position for liability, we have EUR1.5 billion of either non or limited mark-to-market features on our outstanding repo agreements, representing 60% of our total recourse funding. For the full year, our economic net interest income return on equity was 10.5%. Our GAAP return on average equity was 4.9% and our EAT return on average equity was 7.2%. And lastly, for the full year 2023 expenses, excluding servicing fees and transaction expenses, were $55.7 million, down $16.3 million from full year 2020 to a year-over-year reduction of 23%.
That concludes our remarks. We will now open the call for questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question today is coming from Bose George from KBW.
Bose George
Good morning. The first question just was on the comment you made on the book value change in the mark on the liability side, was there any no corresponding mark on the asset side for some of those holdings?
Subra Viswanathan
Hi, this is Subra. Thanks for the question. You know, the portfolio overall Express experienced a mark-to-market benefit during the quarter. What I highlighted those there were actually the reasons where some of the on some of the items that actually caused the book value to go down. But overall, the portfolio, the residential credit portfolio experienced a significant mark-to-market gains.
Bose George
Okay. So the drivers really then words is the ATM issuance and that one, the realized loss that you mentioned, well, this realized loss and there's like two liability facilities.
Subra Viswanathan
One is a prime jumbo facility, which had a we had a bunch of embedded swaps in it, which had a quite honestly a higher mark. But because it was a higher mark on a liability, it was a lower book value for us. And also the other reason was we had two previously we had two and sold securities from our prior securitizations, which were financed in our repo facilities. We then sold them sold them out this past quarter. So now they became SEC debt. So the debt from the time it became SEC debt. And when we sold it to the end of the period, Mark, it experienced a further increase in value, which which reduced our book well.
Bose George
Okay. Okay, that's helpful. Thanks for that. Actually, in terms of the ATM issuance, what was the average price for that, it can be once again. Okay. So let me just confirm that low five confronts us.
Operator
Trevor Cranston, JMP Securities.
Trevor Cranston
Actually just have a follow up on the question about the ATM issuance this quarter on. Can you sort of talk through the thought process on issuing at current valuation versus how you guys think about potentially buying back stock and what goes into that decision?
Phil Kardis
Thanks. Sure. I think as we mentioned, we were looking at where we see Fed rate cuts coming later in the year and kind of opportunities to acquire higher coupon assets at a discount. We thought now is the time to do that. We these assets on a current basis more than cover the dividend associated with that stock and have a potential for upside as rates begin coming down. So we thought this was a good time to go ahead and acquire these kinds of assets.
Trevor Cranston
In terms of continuing to add assets on 2024 and ahead, of rate cuts. Can you talk about how much sort of free capital you feel you have available to do that by deploying our cash on hand versus zero, potentially you're using more capital efficient to buy new assets in the near term?
Phil Kardis
Yes, sure. So we would look at there could be a couple of sources. Clearly, we have our cash on hand and the amount have cash and other liquidity that we would be willing to use is going to be a function of kind of where we see market volatility and rates and as those come down, we can see deploying some of that into new assets as also I mentioned, depending on a variety of factors, we do have callable securitizations. I mentioned for example, the of those are non our RevMax securitizations as those in particular, those are very high of SEC debt. And so there's opportunities to call and collapse those and they have a higher percentage of performing loans, and we can convert those into ready-mix and another nonreg. And so the debt on those on a blended rate could be lower. So that could be another source of capital. So we have several potential sources of capital that we could use in addition to the capital markets. And we are constantly look at those opportunities Okay.
Trevor Cranston
Appreciate it's kind of ticking up.
Stephen Laws from Raymond James.
Stephen Laws
Hi, good morning. Because one last one last question on the ATM or follow up, I think you certainly should in the low fives Fox at 4.5. Now, like what's your what's your valuation sensitivity? You mentioned the yield versus the mid teen return. So is it strictly the dividend yield or how do you guys think about your valuation sensitivity around the continued issuance on the ATM?
Phil Kardis
I mean, it's a combination of those. And I think you know where where where the stock is now I think where they are on their own. There is a limit in terms of, you know, how much dilution we'd be willing to handle, even though we could cover the dividend yield. And so we do look at those factors. So it's a combo. We would want to make sure that we cover the dividend yield and we need to have upside from there and the amount of upside we need depends on how much dilution. And so we'll have to make that trade-off. And that's kind of how we how we look at it obviously where we were in the in the lower fives was one calculation in the mid fours is a different calculation.
Stephen Laws
Great. And then as a follow-up, as you think about your outlook and potential upside. I don't know if it's the long end or the short end or spread tightening or all of it, but if rates stay drop 100 basis points how does that change the return expectation versus the mid 10s kind of current return on these new investments?
Phil Kardis
Yes, yes, as a whole that he will talk about it. You know, it's primarily especially as Phil mentioned in his comments about purchasing the non-agency subs, which are not financed right now. So to the extent, you know, you're not the funding costs go down and we are able to finance them. You know, the returns would be boosted further. That's primarily a function of funding base, not necessarily in our rates going down in the long end. Obviously, you know, and Phil mentioned in his comments, too, as securitization markets become more stable, which we saw like how these prices in January and yesterday, we kind of got a hiccup to the extent they become stable and we are able to accumulate loans and securitize them at a stable macro environment. That's the sector that we're benefiting from the from the long end of the curve, right?
Stephen Laws
So the potential upside would be tied to declining short end.
Phil Kardis
As far as the new investments go, I think that's going to bear fruit. Appreciate the comments. Just one.
Operator
Eric Hagen from BTIG.
Eric Hagen
Good morning, Tom. How are you guys thinking about conditions in the securitization market related interest rate policy at the short end of the yield curve? How do you even see that demand equation changing from securitized debt investors themselves and their appetite for more debt, especially as you think about maybe culling some of the some of the debt that you have and their securitization pipeline already so as I just said, Eric, on you know, we would like to see the securitization markets a little more stable and before we get into the markets again, so we are going to be accumulating loans.
Phil Kardis
And we saw in January, especially in the non-QM space, you know, the triple is priced in a range of like 143 to 150 basis points. And as I said, if this we get a little more clarity in the first half of the year, the loans that we would have accumulated are the loans that we wanted to be securitizing.
Eric Hagen
But how are you thinking about just conditions with respect to call on the pipeline of debt that you have, which is callable right now. I'm just wondering if where you can issue some of that debt and maybe extract some some capital, maybe somebody that's got currently.
Subra Viswanathan
The second debt, if we lock it in at the current rates, it is locked in for a longer period of time. So we are looking for the front end rates in general market to be like the rates to come down so we can get better funding rates for a longer term.
But it also depends on what is available in the market. So sometimes it might be lucrative to take on a little expense on funding.
Eric Hagen
If we are getting very accretive assets in the marketplace right now that does make sense on how are we also thinking about the fixed to floating rate preferred? I mean, it looks like that's going to reset this year. Do you think there's situations or conditions where you might look to call those or redeem them as they turn into their floating leg?
Phil Kardis
Yes, I think we evaluate all those options. As I think as we mentioned right now, we think that way cuts coming in the future at the end of the year and through next year that while though we expect the floating rate to reset higher, we see that coming down over time and probably looking to deploy capital and buying new assets rather than at this point are retiring that. But that's a that's a case by case and fact based analysis that we're constantly looking at. So things could change and we could come to a view that it would make more sense to actually start repurchasing it. But that's part of the mix of how we think about deploying capital in new investments versus reducing that expense.
Operator
Trevor Cranston from JMP Securities.
Trevor Cranston
And just one follow up on. Do you guys have an updated estimate on where book value stands so far in the first quarter?
Phil Kardis
So you know, while the most recent, you know, of any RPL sale traded pretty well with the sell-off in rates since quarter end and especially yesterday, which accelerated, I would say like we are down roughly a point or so percent 1%.
Operator
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.
Phil Kardis
Hi, this is Phil Kardis, and I'd like to thank everyone for participating and our fourth quarter and full year earnings call and we look forward to speaking to you on our earnings call for the first quarter 2020.
Operator
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
