Chimera Investment Corporation (CIM), a player in the real estate investment trust (REIT) arena, often navigates turbulent waters, much like a ship braving choppy seas. Their Q1 2024 earnings transcript paints a picture of volatility, economic uncertainty, and a cautious approach to investment. However, beneath the surface of conservative pronouncements lies a potential catalyst for a book value explosion: the impending wave of resecuritizations.

While most analysts are fixated on Chimera's immediate investment activities and the impact of a "higher for longer" interest rate environment, they seem to be overlooking the significant opportunity presented by Chimera's call optimization strategy. This strategy, essentially refinancing existing securitizations to capitalize on more favorable market conditions, could unleash a torrent of capital, propelling book value skyward.

Chimera CEO Phil Kardis hinted at this potential during the Q1 earnings call, acknowledging that the company is "closely monitoring several of [its] outstanding NR or non-REMIC eligible securitizations for potential resecuritization." He even suggested that "spread tightening experienced this year" has made these resecuritizations more likely, potentially occurring in the second or third quarter.

Why is this so significant? Because these non-REMIC securitizations currently carry high securitized debt costs, burdening Chimera's balance sheet. By converting them to REMIC-eligible structures, the company can dramatically lower its financing costs, freeing up considerable capital for new, accretive investments.

Consider this: Chimera reported $9.79 billion in long-term debt as of December 31, 2023. Even a modest reduction in financing costs, say 50 basis points, on a significant portion of this debt could result in tens of millions of dollars in annual savings. This freed-up capital could be deployed into new investments generating those attractive "low to mid-teen returns" that Kardis mentioned.

But the impact goes beyond just cost savings. Resecuritization can also unlock value by optimizing the structure of existing deals. As Kardis explained, "generally, as the percentage of REMIC eligible loans increases in those securitizations, the economics of exercising the call improves." This means that by strategically restructuring deals, Chimera can further enhance their profitability.

Let's look at the numbers. In 2023, Chimera called six existing securitizations and issued four new ones, generating a total of $133 million in recaptured capital. This demonstrates the potential of call optimization. If Chimera successfully executes its resecuritization strategy on a larger scale in 2024, it could easily recapture hundreds of millions of dollars.

This infusion of capital, coupled with the cost savings from lower financing rates, could translate into a substantial book value increase. In Q1 2024, Chimera's book value appreciated to $7.11 per share, primarily due to spread tightening on reperforming loans. Imagine the impact of a wave of resecuritizations on top of this positive trend.

Book Value Trend and Potential Impact of Resecuritization

The following chart illustrates Chimera's recent book value trend and a hypothetical scenario showing the potential impact of successful resecuritizations.

This hidden weapon, lurking beneath the surface of Chimera's Q1 2024 earnings transcript, has the potential to fundamentally transform the company's financial position. While uncertainty lingers in the broader market, Chimera's strategic approach to resecuritization offers a beacon of hope for investors, potentially ushering in a new era of growth and profitability.

Hypothesis

Resecuritizing non-REMIC eligible deals with a combined outstanding debt of $5 billion could yield a 50 basis point reduction in financing costs, generating $25 million in annual savings.

Assuming a 10x multiple on these savings, this translates to a potential $250 million increase in market capitalization.

Coupled with recaptured capital from called deals, Chimera could see a book value increase of over $1 per share.

These are just estimates, but they highlight the potential magnitude of the book value impact from Chimera's call optimization strategy. While the timing and specific details of the resecuritizations remain uncertain, the potential for a significant book value explosion is undeniably present. Investors would be wise to pay close attention to this development, as it could be the key to unlocking Chimera's true value in the coming quarters.

"Fun Fact: Chimera Investment Corporation is named after the mythical creature, the Chimera, which is a hybrid of different animals. This is reflective of the company's investment strategy, which involves investing in a diverse portfolio of mortgage assets."