CIM - NYSE

Good day, ladies and gentlemen and welcome to Chimera Investment Corporation First Quarter 2025 Earnings Call. All lines have been placed on a listen-only mode and the floor will be opened for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Victor Falvo, Head of Capital Markets. Welcome Sir. The floor is yours.

Thank you, operator, and thank you everyone for participating in Chimera's first quarter 2025 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 events 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 disclaimers in our earnings release and 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 content 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 President and Chief Executive Officer, Phil Kardis.

Thanks, Vic and good morning, and welcome to Chimera Investment Corporation's first quarter 2025 earnings call. It’s great to have you with us today. Joining me on the call are Jack Macdowell, our Chief Investment Officer; Subra Viswanathan, our Chief Financial Officer; and Vic Falvo, our Head of Capital Markets and Investor Relations. After my remarks, Subra will review the financial results, and then Jack will review the portfolio before opening the call for questions. This has been a strong quarter for Chimera. Earnings available for distribution improved by 11%, our book value increased by 7.4%, and our economic return was 9.2%. This quarter also marked something new; it was our first full quarters into acquiring Palisades. The integration was fast, seamless, cultural fit, excellent; strategic alignment, even better. Whether it's third-party advisory, portfolio oversight or core investment strategy, Palisades is now part of the Chimera platform. Third-party loans under management by Palisades Advisory Services are up 43% year-over-year, including an increase of $1.5 billion during the first quarter to nearly $24 billion. Today, when you combine our on balance sheet assets with the assets we manage for others, we're at nearly $37 billion. That's everything in the residential mortgage market, from reperforming, jumbo prime, residential transition and non-QM loans to agency RMBs and residential equity products. It's a deep, diversified residential mortgage platform, and is backed by over $2.6 billion in equity. Why does this matter? Because we are not just adding businesses, we're building capabilities, we're diversifying our revenue, and it's already having a real impact on our bottom-line. We also made impactful balance sheet moves. This quarter, we exercised our call rights on all our non-Remic securitizations and issued 2 new securitizations backed by those loans. This was effectively a cashout refinancing that unlocked $187 million at a reinvestment hurdle below 6%, and there's more. In January, we acquired and securitized $288 million in non-QM loans. We're holding retained bonds unlevered on our balance sheet, and expect a low teen return. In March, we picked up $149 million of agency specified pools. We also settled a $100 million residential transition loans during the quarter. In each case, we expected mid-teen levered [ph] returns. And lastly, we refinanced 2 key non-mark to market facilities before market volatility hit; increasing their capacity, improving their terms, and extending their maturities. Importantly, we extracted more than $100 million of additional cash from these refinancings. So what's next? Even in a volatile market we're holding steady. As of earlier this week, we estimate the current book value to be flat to slightly down from the end of the first quarter. We're continuing to grow our third-party loans under management. We're adding agency RMBS asset to delivery returns, liquidity and flexibility; and we're doing it all with a stronger balance sheet and more liquidity than we had at the start of the year. Looking ahead to the rest of 2025, we're staying focused. We expect to diversify the portfolio, grow recurring fee income, add liquidity, and look for opportunities to add accretive platforms. Here's the big takeaway. We're not just playing defense, we're building Chimera into a hybrid mortgage REIT that's resilient and diversified. Now, I'll hand it off to Subra to walk you through the financials.

Thank you, Phil. I will review Chimera’s financial highlights for the first quarter of 2025. GAAP net income for the first quarter was $145.9 million, or $1.77 per share. GAAP book value at the end of the first quarter was $21.17 per share. For the first quarter, our economic return on GAAP book value was 9.2% based on the quarterly change in book value and the $0.37 first quarter dividend per common share. On an earnings available for distribution basis, net income for the first quarter was $33.5 million or $0.41 cents per share. Our economic net interest income for the first quarter was $72.3 million. For the first 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 first quarter was 3.9 to 1, while recourse leverage ended the quarter at 1.2 to 1. For liquidity and securitized financing, the company ended the quarter with $697 million in total cash and unencumbered assets. In January, we closed on our CIM 2025-I1 securitization. As part of a strategy to mitigate securitization execution risk on certain securitizations, we will short 2-year Treasury future contracts to protect the net interest spread of CIM 2025-I1. This short position was closed out in January. In March, we exercised our call rights and terminated 7 outstanding CIM secularizations and refinanced the loans with 2 new CIM secularizations, enabling the company to extract $187 million in cash. Jack will review in more detail the economics of this activity during his prepared remarks. For repo and hedging, we had $2 billion floating rate sensitivity on our outstanding repo liabilities, and we had $3.2 billion in notional value of various interest rate hedges. Of this total, we have $1.5 billion hedge positions rolling off during the second quarter which will result in a more balanced library hedge position. We had $1.4 billion in either non or limited mark-to-market features on outstanding repo agreements representing 47% of our secured recourse funding. During the quarter, we converted a long position in $500 million swaption into a 1-year pay fixed interest rate swaps with a rate of 3.45%. This quarter we also entered into a $1 billion 2-year so for [ph] interest rate cap with a 3.95% strike to protect against future interest rate movements as existing interest rate swaps matured. We executed on a total of $155 million pay fixed EAD swap futures at a weighted average far rate equivalent pay fixed rate of 3.84%. For the first quarter of 2025 our economic net interest income return on average equity was 11.2%. Our GAAP return on average equity was 25.9%, and our EAD return on average equity was 8.1%. And lastly, compensation, general, administrative and servicing expenses were marginally quarter-over-quarter when excluding included compensation expenses related to the Palisades acquisition. Our transactional expenses were $5.7 million this quarter, reflecting the costs associated with increased securitization activity. I will now turn the call over to Jack to review our portfolio and securitization activity.

Thanks, Subra and good morning, everyone. I'll provide a brief overview of our investment activity during the first quarter, as well as provide insight as to how we were positioned heading into April’s volatility. During the quarter, markets continued adjusting to the new administration's policy priorities, namely immigration reform, efforts to improve government efficiency, and an emphasis on redefining global trade partnerships. Interest rate volatility remained contained through mid-February but spiked on February 19 after the January FOMC minutes reinforced a more hawkish higher for longer stance [ph]. Volatility peaked in early March and then eased following the lease of a softer than expected February PPI and a well received 10-year Treasury auction on March 12. Over the course of the quarter, Treasury yields rallied 36 basis points across 2s and 10s maintaining the year-end curve steepness of 33 basis points. Credit spreads widened during the period, with investment grade and high yield corporate spreads gapping out by 14 basis points and 60 basis points, respectively. Constructed products non-QM AAA spreads widened by 25 basis points, while BBB's backed up by 10. In the agency space, current coupon OAS traded within an 18 basis point range versus swaps, and 13 basis points versus treasuries, ending the quarter roughly unchanged. Housing conditions continue to moderate. National home price growth in February was 3.9% year-over-year, with markets in Texas and Florida flat to down, while northeast cities along with Chicago and Cleveland posting stronger gains in the 6% to 8% range. Resale inventory rose 20% year-over-year but remains roughly 46% below pre-pandemic levels. Affordability remains challenged with 30-year mortgage rates averaging around 7% throughout the quarter based on bank rate statistics. Existing home sales declined to a 4 million unit annualized pace marking the slowest first quarter print [ph] since 2009. Single-family housing starts were down 14% from the prior quarter, as builders remained cautious in the face of rate pressures, price uncertainty, and input cost volatility. That said, mortgage credit fundamentals remain healthy. Borrower equity is at record levels, and both, delinquency and foreclosure activity remain near historic lows. Early April brought renewed volatility tied to the announcement of U.S. tariffs. The Move [ph] Index surged more than 50% in just over a week, and unusually treasury yields sold off amid the volatility on speculation of foreign selling and reported [ph] unwind of levered basis trades. Credit spreads widened across both corporate and structured product markets. While volatility has since moderated, forecasts have generally shifted to reflect lower growth expectations and increased inflation risk for the balance of the year. Amid this backdrop, our season reperforming loan portfolio which comprises the majority of our GAAP assets continue to perform in line with expectations. Serious delinquencies were stable at 8.9%, and prepayments take down to 5.5%. Our Palisades Advisory Services asset management team remained focused on integrating the portfolio into our systems with an emphasis on driving positive outcomes in the loan book. Our book value increased 7.4% during the quarter, largely driven by compression and performing -- by yield compression and performing loans, which was partially offset by wider yields in the non-performing loan cohort. Yields on securitized debt were largely unchanged as spreads widened rapidly in the last week of March neutralizing much of the rate rally during the quarter. We continue to deploy capital in a deliberate and disciplined manner. In light of the macro backdrop, we have built additional liquidity and positioned our portfolio to withstand volatility, spread widening, and funding shocks if they were to emerge. Importantly, this should also allow us to be opportunistic during periods of market dislocation. During the quarter, we settled a $288 million DSCR securitization, and purchased $149 million of specified pools. We also closed $100 million of short duration residential transition loans and committed to another $32 million for settlement in the second quarter. Our team continues to actively evaluate MSR opportunities with potential for us to execute in that sector later in 2025 as a way to generate attractive returns while simultaneously helping to balance the duration risk in other parts of the portfolio. As mentioned by Phil and Subra, some of the quarter’s most impactful activity was on the liability side. We refinanced two structured repo lines with combined capacity of more than $610 million, extending the maturities by 18 and 24 months, while lowering costs and securing mostly fixed rate non-mark-to-market terms. This unlocked more than $100 million of investable cash at attractive rates. I'm going to pause briefly and ask that you turn your attention to Page 16 of our investor presentation. Here, we added a supplemental slide that walks through a series of transactions we completed in March. As part of these transactions, we exercised our redemption rights on all $312 million [ph] of its outstanding securities tied to our 7 non-remit securitizations. These deals collateralized by $646 million of season loans have built significant embedded equity over the years at senior bonds and paid down and loan performance improved. We refinanced those loans into 2 new securitizations totaling $517 million in senior bonds, 1 Remic and 1 non-Remic transaction, further enhancing the cash flow profile of our retained interest and releasing $187 million of cash for reinvestment. As you can see from the middle box on the slide, while our overall cost of funds went down, the additional debt will increase our annual run rate interest expense by approximately $11 million. That implies our breakeven return-on-capital is approximately 5.8%, meaning any incremental return generated in excess of 5.8% should be accretive to earnings. Overall, we view these transactions as foundational. They reflect our ability to generate capital organically, enhance liquidity, and continue positioning portfolio for resilience and optionality. These actions left us well positioned entering April. We ended the quarter with $253 million in cash, and $444 million of unencumbered assets. This allowed us to comfortably hold cash during the initial period of volatility. Importantly, the resilience of our liability structure limited margin calls to less than $20 million during the volatility, despite the market dislocation. By mid-to-late April, we began selectively adding agency MBS exposure at attractive entry points. However, we remain cautious and expect a relatively high bar for capital deployment given the ongoing uncertainty in current macro environment. As we mentioned last quarter, our focus remains on constructing a durable portfolio that supports attractive risk adjusted returns to recycles. Agency MBS and MSRs remain areas of emphasis complementing our core credit related loan investments. We continue to evaluate non-QM and DSER loans. However, we anticipate any near-term investments be opportunistic in nature given our stated portfolio objectives. We continue to recycle capital in our short duration residential transition loan book, and intended to maintain that allocation as a component of our strategy moving forward. This was a strong quarter. We deployed capital tactically into accretive investments, raised cash organically and significantly improve the flexibility of our funding stack, all of which helped us navigate April's volatility and positions as well going forward. As always, we remain focused on disciplined risk management and thoughtful portfolio construction. That concludes our remarks. We'll now open the line for questions.

[Operator Instructions] We'll take our first question from Doug Harter from UBS.

Just first for clarification. When you said book value was flat to slightly down, so far in the second quarter, just -- can you just put some numbers around what slightly down might mean?

I think as of Tuesday, Doug, is down about 40 basis points.

Great. That's super helpful. And then, I guess, how should we think about the timing to deploy that extra $187 million of investment capital that you freed up with the re-securitization. And then with -- you know, kind of with that and the earnings power you delivered this quarter, how are you thinking about the dividends?

Yes. So I can talk quickly about the deployment of the capital. So I would say, up to this point, we probably deployed about a third of 40% of it. Like we said in the prepared remarks, I mean, the bar for capital deployment in this environment, certainly on the credit side, is somewhat high. Our focus is right now building up that liquidity bucket. We think that's an important component of our -- both, near-term and long-term strategy. So we have been deploying that into agency MBDS; we see the relative value there. Being attractive, we also see -- based on how we’re hedging out the duration risk, that helping with our book value volatility. So in the near-term, that is our focus. We were trying to predict how long it would take to deploy. Like I said, we’re probably -- a third or 40% of it allocated upto this point, and we would technically look to deploy the remainder subject to cash reserves and that kind of stuff over the next 4 to 8 weeks.

And Doug, just to fill about the dividend. That's something that we'll probably start thinking about in the next month or so. And as you know, there's a variety of factors that go into that in terms of what we look at for a board determination. But I think it's just premature at this point for us to think about that, given the market volatility; we'll see how things play out over the next month or so.

Thank you. And we'll take our next question from Trevor Cranston from Citizens.

Looking at the third-party business, the growth seems like it’s been pretty consistent over a lots of several quarters. Could you talk about the outlook for that business in terms of the growth potential over the next year or two?

Look, I mean we’re -- we believe that there is a fair amount of growth potential there; it's -- so we're bullish on this. But you know, it depends on a variety of factors. As third-parties continue to purchase loans, I mean we provide a valuable service to them in terms of what I would call the blocking and tackling aspect of it. And so -- we think there is still upside as we continue to bring in new clients. But that is something that's, you know, just going to depend on kind of where we see the mortgage market go. But as both growing within existing clients and we're adding some new clients.

Got it. Okay, that's helpful. And then on the flat book value performance in -- just starting with second quarter. Have you guys basically seeing credit spreads fully recover from the widening in the early part of April or can you just take us through kind of the moving parts of the flat book value?

Yes. So we've seen -- yes, it's a good question. I mean from a credit spread perspective, we have seen -- it was just April through today, generally, some widening in spreads. We've seen it retrace from the wide, but about halfway, I would say. Does that make sense?

Yes. So the remainder of -- how do you get to a flat book value? Is that coming from -- like, the interest rate component effects [ph]?

Yes, no. So you have to remember, when we -- our book value is impacted by both, our assets and liability. So the change in book value is going to also be affected by how rates move across the curve. So our -- some of our securitized debt is shorter duration and our loan is a longer duration; the way that we get back to a flat book value quarter to -- in the second quarter, quarter-to-date -- basically the deterioration of loan value from wider credit spreads has also been offset by the change in the securitized debt as well. So they're basically offsetting each other.

Yes, got you. Okay. That makes sense.

And just one thing that I would point out too; we tried to add additional disclosure in the investor presentation. So we put a couple of new slides in there that provide additional detail with respect to our loan and securitized debt portfolio. So hopefully having that information will help the market get a sense of how the book value is moving into different components, but it is a new loss portfolio.

Yes, got it. Okay. Thank you.

[Operator Instructions] And we'll take our next question from Bose George from KBW.

In terms of book value going forward, after the hedges roll off in the second quarter, what is your portfolio duration going to look like?

Keep in mind, notwithstanding what we're doing on the agency side and in the first quarter, that was relatively minute. But we hedge the interest -- floating rate interest rate risk on our short duration repo. So even the hedges that we have along with our swaps and our cap and everything we have on now, that really isn't there to protect book value. With the way that we sort of look at things is, when we buy loans, we securitize them; that is in effect locking in our net interest margin and providing the hedge for our assets. Now that we consolidate the loans and securitization on our balance sheet, that does create some book value volatility. But when the -- the way that we're looking at our hedge strategy is when those hedges roll off, that will increase our exposure to our floating rate liabilities. It really won't have much impact at all on the volatility in our book value. And the way that we're looking, just like -- just to expand on that a little bit because the book value element is something that we are focused on from a portfolio construction standpoint, we're not necessarily looking to hedge our book value risk and incur those costs given the way that we finance our portfolio. But we do believe that through adding an agency component, adding MSRs; that is a natural way where we can add yield generating assets that will balance the duration volatility in our credit book.

Okay, great. Thanks. And then just in terms of the deployable capital, there was $187 million. Was there another number you mentioned earlier in the call? I thought it was $100 million but -- yes, just wanted to clarify if it was just $187 million or was there another number as well.

Yes. So there were multiple activities or a series of transactions that occurred in the first quarter. In addition to the re-securitization of our non-Remic transactions, that’s the $187 million. We also refinanced 2 structured repo facilities, and in -- we lowered our cost of funds in those facilities. We extended the term to 18 to 24 months, and collectively we were able to extract an additional $100 million -- approximately $100 million in investable cash.

Okay. And so should we see that $100 million as kind of fully deployable; so it's really $287 million that you can invest?

That's right.

Okay, great. Thanks.

And we'll take our next question from Eric Hagen from BTIG.

What's the right way to maybe think about the sensitivity to higher delinquency rates from here; between the RPL portfolio and it seems like the non-QM and some of the newer issue loans and other opportunities you talked about? I mean, on the one hand, like the RPL portfolio is conditioned on being delinquent, right? And the DQ rate is already relatively high and the non-QM is starting from a lower point. So, like -- what are your expectations for how each of those asset classes could respond to higher delinquency rates from here?

Yes, that's a great question. And we -- I mean, obviously, being a credit oriented shop, we think about that all the time. And I actually wouldn't characterize the delinquencies in the RPL portfolios being high for that type of product. I think if you look across the RPL universe, right around that 10% level is pretty, pretty average. And I would say, just looking at the trends in our portfolio, that level has been very stable overtime. Keep in mind, these are very unique borrower cohorts; they got a lot of equity, they’ve been in the house for over 17 years. Often times, you have life events that cause delinquencies for a month or two at a time; it does require some degree of engagement by the servicers, and that's sort of where our Palisades asset management capability comes into play. Just making sure that when there is some sort of hardship, often times temporary, that they're making right party contact with these borrowers, understanding what their situational profile is; and then working collaboratively to try to remedy that. And then on the non-QM side; the nice thing about those portfolios these days -- just given the amount of equity, the credit quality of those portfolios, we have seen, just in general, non-QM delinquency starting to trend upwards. So it's definitely something that we're monitoring, not just in our portfolio, but just across the market in general, as we think about deployment of capital. And just from a sensitivity standpoint; credit risk is the risk that we take, and that's why we have a massive management team. That's why we have systems and infrastructure in place to ensure that we are managing that risk appropriately. But right now, just given the equity in the market, given the credit fundamentals that we're seeing across mortgage finance; we don't have a high degree of concern that we're going to have significant risk in our portfolio with respect to an increase in the policy delinquencies.

That's really good color. I appreciate that. You mentioned the 2 new loan facilities, if that’s what I heard you say. What's the advanced rate on those facilities? And are those specifically for the subordinate securities that you guys retain? And the counterparty on those facilities; are those banks or non-banks?

Yes. So they're structural repo facilities. We're really not going to give out the advance rate on these but the assets are a lot of our derivatives or retained positions. So really the advance rate is sort of -- doesn’t makes a lot of sense unless you understand the underlying collateral. And those were done through banking relationships.

Got it. And are there margin call holidays or such on the structure repo facilities?

That's a great question. So, we extended the terms and those are non-mark-to-market or limited mark-to-market facilities, which -- that actually is in the prepared remarks. It is a big push that we have, and even during the April volatility our margin calls were limited to less than $20 million during that entire timeframe, which is really a testament to the efforts that have gone into structuring our different financing lines.

[Operator Instructions] And there appear to be no further questions at this time. I'll turn the floor to Phil Kardis for closing remarks.

Hi, this is Phil Kardis. And I want to thank everyone for participating in our first quarter 2025 earnings call. And we look forward to speaking to you in a couple of months for our second quarter earnings call. Thank you.