Executive Summary

Chimera Investment Corporation is a publicly traded real estate investment trust (REIT) that primarily invests in a diversified portfolio of mortgage assets. The company’s principal business objective is to provide attractive risk-adjusted returns through the generation of distributable income from its investment portfolio and fees from providing investment management and advisory services to third parties.

In 2024, Chimera navigated a challenging operating environment marked by interest rate volatility and high inflation. The company focused on increasing liquidity, diversifying its sources of income, and selectively deploying capital into higher-yielding assets. Key highlights for the year include:

• Raised $140 million through two unsecured debt offerings and deployed the proceeds into Agency CMOs and subordinated tranches of third-party mortgage securitizations.
• Committed to purchase $1.1 billion in residential mortgage loans, including seasoned re-performing loans (RPLs), non-qualified mortgages (Non-QMs), and business purpose loans (BPLs).
• Completed the acquisition of Palisades Group, a residential real estate asset management firm, adding a new fee-based revenue stream.
• Maintained a disciplined hedging strategy to manage interest rate risk.
• Declared $1.42 per share in common stock dividends.

Market Conditions and Strategy

The U.S. economy experienced mixed signals in 2024, with inflation moderating early in the year before picking up again towards the end. The Federal Reserve responded by cutting interest rates by 100 basis points in the fourth quarter. This interest rate volatility was reflected in mortgage rates, which peaked at 7.22% in May before declining to 6.85% by year-end.

Against this backdrop, Chimera focused on enhancing portfolio liquidity and diversifying its income sources. The company increased its allocation to Agency RMBS, which now make up 8% of the portfolio, and invested in subordinated tranches of third-party mortgage securitizations. Chimera also continued to selectively acquire residential mortgage loans, with a focus on seasoned RPLs, Non-QMs, and BPLs.

Looking ahead, the company plans to further diversify its portfolio by growing its Agency RMBS holdings and exploring opportunities to acquire mortgage servicing rights (MSRs). Chimera also intends to expand its fee-based investment management and advisory services through the Palisades acquisition.

Financial Performance

Chimera reported net income available to common shareholders of $90 million, or $1.12 per diluted share, for the year ended December 31, 2024. This represents an increase compared to $52 million, or $0.68 per diluted share, in the prior year.

The key drivers of the improved financial performance were:

• A $35 million increase in net gains on derivatives.
• A $26 million decrease in net losses on sales of investments.
• An $8 million decrease in transaction expenses.

These positive factors were partially offset by a slight decrease in net interest income, which fell from $263 million in 2023 to $265 million in 2024. The decline in net interest income was primarily due to a $12 million decrease in interest income, driven by a reduction in the company’s average interest-earning assets.

Chimera’s economic net interest income, a non-GAAP measure that adjusts for the impact of interest rate swaps, increased from $271 million in 2023 to $281 million in 2024. The company’s net interest rate spread, which represents the yield on average interest-earning assets less the economic average cost of funds, improved by 20 basis points to 1.5% in 2024.

The company’s Earnings available for distribution, another non-GAAP metric that excludes certain non-recurring and non-cash items, remained relatively flat at $121 million, or $1.48 per adjusted diluted share, compared to $119 million, or $1.53 per adjusted diluted share, in the prior year.

Portfolio Composition and Leverage

As of December 31, 2024, Chimera’s portfolio consisted of 88% residential mortgage loans, 8% Non-Agency RMBS, and 4% Agency MBS (including Agency CMOs) on a fair value basis. The company’s GAAP leverage ratio remained stable at 4.0:1, while its recourse leverage (excluding non-recourse securitized debt) increased from 1.0:1 to 1.2:1.

Chimera’s secured financing agreements had a weighted average borrowing rate of 6.48% at the end of 2024, down from 7.51% a year earlier, reflecting the impact of the Federal Reserve’s rate cuts. The company’s securitized debt, which represents non-recourse financing, had a weighted average cost of 3.7%.

Liquidity and Capital Resources

Chimera ended the year with $84 million in cash and cash equivalents, down from $222 million at the end of 2023. The company’s operating activities generated $206 million in net cash, while its investing and financing activities used $178 million and $522 million, respectively.

The company’s recourse leverage ratio of 1.2:1 at the end of 2024 remained relatively low, providing ample liquidity to fund its operations and investment activities. Chimera also had $526 million in unencumbered assets available to access additional short-term financing or sell to raise cash, if necessary.

During the year, Chimera issued $140 million in unsecured senior notes, further diversifying its capital structure and providing long-term financing for its mortgage credit portfolio. The company also called and re-securitized some of its non-recourse securitized debt to manage its liability structure and interest rate risk.

Outlook and Strategy

Looking ahead, Chimera plans to continue diversifying its portfolio, increasing liquidity, and growing its fee-based income streams. The company expects to allocate more capital to Agency RMBS, which it believes will provide portfolio diversity, more stable dividends, and a source of liquidity for opportunistic asset and business acquisitions.

With the Palisades acquisition, Chimera has embarked on a strategy to enhance returns to shareholders through diversification of revenue from fee-based income. The company intends to expand and grow its non-discretionary investment management and advisory services in the coming years.

To fund these portfolio diversification and growth initiatives, Chimera plans to leverage its existing portfolio by calling and, if market conditions are favorable, re-securitizing its non-recourse securitizations and some of its recourse securitizations. The company also intends to use financial derivatives, such as futures, interest rate swaps, and swaptions, to hedge against securitization executions and net interest margin compression.

Conclusion

Chimera navigated a challenging market environment in 2024 by focusing on increasing liquidity, diversifying its sources of income, and selectively deploying capital into higher-yielding assets. The company’s financial performance improved year-over-year, driven by gains on derivatives and lower losses on sales of investments.

Looking ahead, Chimera plans to continue executing on its strategy of portfolio diversification and growth, with a focus on expanding its Agency RMBS holdings and fee-based investment management and advisory services. The company’s disciplined approach to risk management and capital allocation positions it well to generate attractive risk-adjusted returns for shareholders in the years to come.