Chimera reported "core" EPS of $0.13, $0.01 ahead of our estimate and the consensus. Higher net interest income accounted
for the upside relative to our estimate. GAAP EPS were $0.24 including $0.11 of gains on RMBS sold.
• Book Value: Book value increased 13% in the quarter to $3.27 as a result of positive mark (net of realized gains) on RMBS
($0.25/share) and realized gains on RMBS sold ($0.11/share); this was 11% ahead of our estimate. Excluding the cumulative
negative AOCI mark book value stands at $3.35, up 4% in the quarter.
• Investment Portfolio: The investment portfolio increased by $152 million (4%) in the quarter compared to our estimate of $220
million of growth. Factoring in the $1.0 billion of asset sales from the re-securitizations asset growth exceeded our
expectations. Non-Agency RMBS increased by $250 million to $2.0 billion, 3% ahead of our forecast despite the asset sales.
Average earning assets were 27% higher than our estimate and 26% higher than the end-of-period investment portfolio given
the asset sales.
• Re-securitization: During the third quarter Chimera completed two re-securitization transactions totaling $3.2 billion. Under the
accounting for these transaction new securities are created and the sold securities are removed from the balance sheet as
opposed to being treated as a secured financing. The newly created AAA securities totaled $1.7 billion (56% and 53% of the
total transactions). As of quarter-end Chimera has sold $1.0 billion (57%) of the AAAs. Ultimately we expect Chimera to sell
the remaining AAAs and reinvest into higher yielding assets.
• Leverage: In aggregate Chimera had leverage (debt to equity) of 0.9x. Chimera's "economic" leverage is higher given the $1.5
billion of newly created subordinated tranches of the re-securitizations.
• Revenue: Net interest income totaled $95.5 million, $6.0 million (7%) ahead of our estimate as a result of higher than
expected average earning assets and partially offset by a lower than expected net interest spread. The net interest spread
was 604 bps in the quarter, up 161 bps from the second quarter, but 156 bps lower than our estimate. Chimera did not
disclose the spread at the end of the quarter.
• EPS Outlook: The re-securitizations that Chimera completed in the quarter increase the earnings power of the company
through the addition of "economic" leverage in the form of new subordinate tranches of re-securitizations to enhance returns.
We will look for more details on the conference call (and 10-Q) as to the details of the re-securitization in order to size the
magnitude of the increased earnings power.
• Chimera is trading at a 12% premium to current book value. With the incremental earnings power of the company following
the quarter's financings, coupled with improved book value, makes the risk/reward more attractive. We are maintaining
Neutral rating as we attempt to size the increased earnings power.
• Management will host a conference call Tuesday, November 3 at 10:00 AM.