Overview of Chimera Investment Corporation

Chimera Investment Corporation is a publicly traded real estate investment trust (REIT) that primarily invests in a diversified portfolio of mortgage assets, including residential mortgage loans, non-agency residential mortgage-backed securities (RMBS), agency RMBS, agency commercial mortgage-backed securities (CMBS), business purpose and investor loans, and other real estate-related assets. The company uses leverage to increase potential returns from its investments.

Financial Performance

For the quarter ended June 30, 2024, Chimera reported net income available to common shareholders of $34 million, or $0.42 per average basic common share, compared to $111 million, or $1.37 per average basic common share, for the previous quarter. The decline in net income was primarily driven by lower mark-to-market gains on the company’s portfolio, lower net gains on derivatives, and an increase in preferred stock dividend expense.

For the six months ended June 30, 2024, Chimera reported net income available to common shareholders of $145 million, or $1.78 per average basic common share, compared to $57 million, or $0.73 per average basic common share, for the same period in 2023. The increase in net income was primarily driven by an increase in net gains on derivatives, a decrease in net losses on sales of investments, an increase in unrealized gains on financial instruments at fair value, and a decrease in deal expenses.

Revenue and Profit Trends

Interest income increased slightly by $143 thousand, or 0.1%, to $187 million for the quarter ended June 30, 2024, compared to the previous quarter, primarily due to the purchases of Agency CMO investments and an increase in average interest-earning assets. For the six months ended June 30, 2024, interest income decreased by $13 million, or 3%, to $373 million, compared to the same period in 2023, primarily due to a decrease in average interest-earning assets.

Interest expense decreased by $2 million, or 2%, to $119 million for the quarter ended June 30, 2024, compared to the previous quarter, primarily due to lower securitized debt balances and lower secured financing agreements collateralized by loans held for investment, non-agency RMBS, and agency CMBS. For the six months ended June 30, 2024, interest expense decreased by $10 million, or 4%, to $241 million, compared to the same period in 2023, primarily due to a decrease in average secured financing agreements balance.

Chimera’s economic net interest income, a non-GAAP measure, increased by $4 million to $72 million for the quarter ended June 30, 2024, compared to the previous quarter, primarily due to a lower interest expense on securitized debt. For the six months ended June 30, 2024, economic net interest income increased by $4 million to $140 million, compared to the same period in 2023, primarily due to lower secured financing agreement interest expense.

Strengths and Weaknesses

Strengths:

• Diversified investment portfolio across various mortgage asset classes
• Ability to generate consistent net interest income through the use of leverage
• Successful implementation of call optimization strategy on securitizations
• Diversification of financing sources, including the issuance of unsecured debt

Weaknesses:

• Exposure to interest rate and credit risk, which can impact the company’s financial performance
• Reliance on secured financing agreements, which can be subject to margin calls and refinancing risk
• Potential volatility in the company’s financial results due to mark-to-market adjustments on its investments and derivatives

Outlook and Future Prospects

The bond market experienced a sell-off early in the second quarter of 2024 as the outlook dimmed for the Federal Reserve to lower rates against a backdrop of stubbornly high inflation. However, by quarter-end, the bond market began to rally, as expectation of future inflation began to moderate and investors became more convinced that the Fed would begin to lower interest rates in September.

Chimera remained active during the quarter, deploying the proceeds from its recent debt and equity raises. The company purchased approximately $16 million in subordinated tranches of new issue mortgage securitizations, $443 million in floating rate Agency CMOs, and committed to purchase $486 million of reperforming loans.

The company’s financing costs increased during the second quarter due to slightly higher leverage and moderately higher rates. Chimera has managed its portfolio consistent with its belief that short-term interest rates will be higher for longer and has used financial derivatives, such as interest rate swaps and swaptions, to hedge against net interest margin compression.

Looking ahead, Chimera plans to continue acquiring and securitizing mortgage loans, as well as further implement its call optimization strategy on its securitizations. The company is currently most focused on its non-rated deals for call optimization. With available funds, Chimera will evaluate the merits of any new investments, as well as other uses of capital, such as repurchasing outstanding common and preferred stock or reducing higher-cost liabilities as they mature.

Conclusion

Chimera Investment Corporation has demonstrated its ability to navigate the challenging market environment and generate consistent net interest income for its shareholders. The company’s diversified investment portfolio, successful implementation of its financing and hedging strategies, and focus on call optimization have positioned it well for the future. However, the company remains exposed to interest rate and credit risk, which could impact its financial performance. Investors should closely monitor Chimera’s ability to manage these risks and continue to generate attractive risk-adjusted returns.