Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation third quarter 2021 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session.

If you would like to ask a question at that time, simply press star and the number one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, press the pound key. We ask that while posing your question, you pick up your headset to allow for optimal sound quality.

It is now my pleasure to turn the floor over to Victor Falvo, Head of Capital Markets. Please go ahead..

Thank you Operator, and thank you everyone for participating in Chimera’s third quarter 2021 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 statements are based on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the Risk Factors section of 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 disclaimer in our earnings release in addition to 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 a 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 CEO and Chief Investment Officer, Mohit Marria..

Thanks Vic. Good morning and welcome to the third quarter 2021 earnings call for Chimera Investment Corporation. Joining me on the call today are Choudhary Yarlagadda, our President and Chief Operating Officer; Subra Viswanathan, our Chief Financial Officer; Kelly Kortman, our Chief Accounting Officer; and Vic Falvo, our Head of Capital Markets.

After my remarks, Subra will review the financial results and then we will open the call up for questions.

This quarter and throughout the year, we have continued to bolster our liability structure through securitization activity and improvements made to our repo facilities, both in rate and 10-year, and for the year we have re-securitized 13 of our legacy reperforming deals totaling roughly $6 billion.

Securitization has enabled Chimera to lock in long term, non mark-to-market financing while inflating our high yield risk retention assets from voluntary prepayments.

Actions taken this year have made a significant impact on the earnings and have reduced the cost of financing for our loan portfolio on non-agency RMBS by 140 basis points since year end. We expect the many actions taken on our liability structure to have a positive impact on our earnings available for distribution for many quarters into the future.

Interest rates rallied to start the third quarter while the yield on 10-year treasuries initially falling by 25 basis points. The rally failed to hold up when the market rhetoric picked up about concerning higher inflationary expectations.

The Federal Reserve provided clarity to the markets about their potential ongoing of quantitative easing and despite intra-quarter volatility, the 10-year ended the quarter at 1.49% yield, virtually where it began in July.

The housing market continued to trend towards higher home prices with the Case-Shiller Index showing year-over-year national home price appreciation of nearly 20%, the largest gain in more than 30 years.

We expect positive HPA to continue in the near term as mortgage rates remain low, housing inventory remains tight, and the economy continues to emerge from the global pandemic. Investor demand for spread product remained strong this quarter with spreads on U.S. high grade and high yield indices hovering near all-time tights.

These market conditions have yielded positive benefits for Chimera’s securitization business while resulting in considerable price appreciation of our residential loan portfolio and overall improvement of the company’s book value. This quarter, we continued execution of our call optimization strategy.

In July, we called our CMLTI 2017-RP2 securitization which carried a 4% cost of debt. Subsequently we sponsored $450 million CIM 2021-R5 with reperforming loans, of which approximately $180 million was from the previously called deal and the remainder provided from our loan warehouse.

We sold 383 million senior securities, representing 85% of the capital structure with a 1.99 average cost of debt, approximately 200 basis points below the cost of the previous CMLTI financing. We retained for investment 67 million subordinate notes and interest-only securities from the deal.

This securitization becomes callable by Chimera any time, beginning August 2024. We also sponsored $435 million CIM 2021-INB1, our first agency eligible investor loan securitization of 2021. We created and sold $408 million in securities, representing a 94% advance rate.

This deal is not consolidated on our balance sheet; however, Chimera invested $27 million in subordinate and interest-only securities. The investor loan deal was rated by Moody’s and Kroll and Chimera retained a 10% clean-up call.

While we have made many long term improvements to our liability structure, this quarter we made a significant amount of new asset purchases for our investment portfolio. This quarter, we purchased and settled $583 million reperforming loans with a 3.63 weighted average coupon. The loans have an average balance of $241,000 and are 15-year seasons.

In early October, we securitized $354 million CIM 2021-R6 with reperforming loans from our loan warehouse. We sold $363 million in notes, representing a 95% advance rate, the highest advance rate we have received on reperforming loans to date. The average cost of debt for the R6 deal is 1.53%.

Chimera retained an $18 million investment in subordinate notes and interest-only securities. The R6 deal was rated by Fitch and DBRS and will be callable beginning September 2026. We continue to expand our business purpose loan segment of our portfolio.

This quarter, we purchased $115 million in business purpose loans with an 8.4% gross coupon and a 6.7 coupon net of servicing and asset management. These loans have compelling fundamental investment characteristics and are very short duration assets.

We currently finance business purpose loans in our loan warehouse which produces an attractive net interest spread for the portfolio with a very low duration risk.

This quarter’s BPL purchase brings our year-to-date total to more than $318 million and we continue to seek additional opportunity to purchase additional business purpose loans and expand upon this business. This quarter, we also committed to purchase $148 million of reperforming loans for our portfolio.

These loans have a 4.2 weighted average coupon and are 178 months seasoned. The average loan balance is expected to be around $175,000. These loans did not settle prior to quarter end, however we expect to settle these loans in the fourth quarter for future securitizations.

In total, this quarter we committed to purchasing nearly $850 million in loans, which highlight Chimera’s continued ability to acquire desired mortgage assets through many economic and interest rate cycles. We have accumulated and maintained a large portfolio of seasoned reperforming loans over the last seven years.

These assets continue to produce high yields for the portfolio while demonstrating a consistency in prepayments over many economic and interest rate cycles.

As we have stated in the past, the delinquencies in default rates on our loan portfolio have outperformed our original expectations, and over the last12 months despite the pandemic, delinquencies have continued to improve.

The homeowner in our loans have demonstrated resiliency over time with many benefiting from the recent strength of the housing market. Mortgage securitization has been a primary component of our business model for more than a decade.

We have utilized loan securitization to help manage both our liquidity risk and mark-to-market risk as our primary source of financing. Over the last six years, most of our securitizations were structured with explicit call options which has enabled us to take advantage of favorable market conditions available so far in 2021.

With the current strength of our balance sheet, we believe we can continue to seek new opportunities and grow our portfolio as the country begins to normalize and eventually exit from the COVID pandemic. We strive to be best-in-class asset and liability managers in the mortgage REIT industry.

Our primary objective is to provide our shareholders with a stable and sustainable dividend while managing our asset and liability risk to the best of our abilities to minimize book value volatility into the future. I will now turn the call over to Subra to review the financial results for this quarter..

Thank you Mohit, and good morning everyone. As you may have noted from our earnings release this morning, effective this period we will no longer report on the non-GAAP measure, core earnings, and instead report on a new non-GAAP measure, earnings available for distribution.

While our terminology has changed, our method for the calculation of earnings available for distribution is identical to the previous calculation of core earnings. Now I will review Chimera’s financial highlights for the third quarter of 2021.

GAAP book value at the end of the third quarter was $12.32 per share, and our economic return on book value was 10.5% based on the quarterly change in GAAP book value and the third quarter dividend per share. GAAP net income for the third quarter was $313 million or $1.30 per share.

On an earnings available for distribution basis, net income for the third quarter was $102 million or $0.42 per share. $14 million or $0.06 per share of our earnings available for distribution were the result of income received on securities that have been called. Economic net interest income for the third quarter was $149 million.

For the third quarter, the yield on average interest earning assets was 6.3%. Our average cost of funds was 2.4%, and our net interest spread was 3.9%. Total leverage for the third quarter was 3.1 to 1, while recourse leverage ended the quarter at 1 to 1.

For the quarter, our economic net interest return on equity was 16% and our GAAP return on equity was 35%. Our expenses for the third quarter excluding service fees and transaction expense were $18 million, up slightly from last quarter. That concludes our remarks, and we’ll now open the call for questions..

We’ll take our first question from Bose George of KBW..

Hey, good morning everyone. This is actually Mike Smith on for Bose. Congrats on a really strong quarter.

My first question is we’ve heard that RPL and NPL dollar prices are pretty elevated, which has made returns on securitizations a little bit less attractive, so I was just wondering if you could provide any color here, and then maybe in certain instances, does it make sense to just call and sell, as opposed to call and securitize?.

Sure, good morning Mike. Yes, loan pricing obviously has during the quarter 2021 and reflected in the strong performance of our book value this quarter, but it’s the credit that you pick and the securitization that you can execute that determine how effective of a purchase it is.

As we mentioned, even in a tighter environment for spreads on loans, we were able to acquire $850 million of loans in Q3.

We are looking to securitize these loans in the coming quarters, and the amount of advance rates we can achieve, we think still can generate attractive returns on the retained pieces to the tune of probably mid, high single digits on the back, and on a cash and a loss-adjusted basis and with some small leverage, it could be double digits pretty easily, so we are still pretty optimistic on the liability of securitizations in addition to acquiring loans, even with where prices have gotten..

Great, that’s helpful color. Then just one more on the BPLs. There’s been a lot of M&A activity and there’s certainly a lot of institutional interest in the space.

I was just wondering, has any of this changed the expected returns or how you source loans?.

Again, I think these are pretty short duration assets, which is an attractive thing in this rate environment with expectations of rates moving higher. As we highlighted, our gross coupon from what we’ve acquired is just north of 8%, and on a net basis it’s very high 6s. Again, there is differing niches within the business purpose loan space.

We haven’t seen any change in the returns being offered to us among what we can attain, and we’re looking to grow that subset of our portfolio more meaningfully in 2022..

Great, thanks a lot for taking the questions..

No problem, thanks Mike..

Our next question is from Eric Hagen of BTIG..

Hey, good morning. First question, on the $240 million of unrealized gains in the period, can you tease apart what the factors were that led to that? It felt like we came into the quarter with credit spreads already pretty tight. Just wondering what maybe some of the individual factors that led to that were..

Sure Eric, I’ll start and I’ll let Subra and Kelly add if I miss on anything. As the question just asked by Mike, given how strong the loan performance and where pricing has gotten, that is the key driver of the book value appreciation in Q3.

Loan spreads tightened an additional 40 basis points quarter over quarter, and with an implied duration of around four to five years, that’s a meaningful uptick on our loans held for consolidation and investment. That was a key driver.

We agree with you - with spreads already pretty tight coming into Q3, most of the other spread products and securities that we hold were primarily unchanged for the quarter.

Subra or Kelly, is there anything else you would add to that?.

No, that pretty much summarizes it well..

Yes, that was helpful, but what were the factors individually? Is there a lower severity rate that’s being applied to the loans, or is it faster prepayment speeds? What are the actual factors that are driving that?.

Again, I think obviously the performance of the credit speaks for ourselves, so the speeds have upticked a little bit given the low rate environment.

Strong home price appreciation has decreased LTVs, as we also discussed in the Q2 call, as well as the lower LTVs resulting in all-in lower severity, so overall loss expectations have obviously gone down for mortgage assets. But more so than that, it’s just the demand for the assets within the secondary market.

As you guys know, the GSEs are the largest seller in addition to some banks and funds, and in the secondary market loan trading spreads were 40 basis points tighter quarter over quarter, which is driving upside on our large residential seasoned portfolio of loans, so all the other metrics that you’ve mentioned as it relates to performance have all improved, leading to some price appreciation; but the net of it is just the secondary trading from loans still is very attractive relative to other mortgage products in terms of an all-in yield with upside to, again, long term performance..

Got it, okay.

Then on the loan warehouse financing, can you guys talk about how much capacity you have there to finance any potential growth in the portfolio?.

Sure. Over the third quarter, we bought $850 million, all of which is going to be warehouse financed. But as we’ve said over numerous calls, our objective is to securitize those as quickly as possible.

Our typical holding period on a warehouse line would be anywhere between two to three months with a securitization exit, so we have plenty of capacity to add to the lines currently if we saw opportunities between now and year end, and again with the securitization market still pretty strong, we’re looking to continue securitizing.

As we mentioned in our opening remarks, we did do a securitization right after quarter end and we got pretty effective execution on it. .

Right, and sorry if I missed it, but the 850 that you guys bought, what was the breakdown between fix and flip, prime jumbo, and RPL?.

Of the 850 we bought, $115 million of that is fix and flip, and the remaining is all seasoned reperforming. None of that is prime jumbo. .

Okay, the prime jumbo is not included - got it. Thank you very much. .

No problem, thanks sir..

Once again, to ask a question, that is star, one on your telephone keypad. We’ll move next to Trevor Cranston of JMP Securities..

Hey, thanks. Good morning. A follow-up on the question about BPLs and trying to grow that portfolio going forward. We’ve seen some peers look to acquire lenders in that space as a way to secure an asset flow.

I was curious if that’s something you guys have considered or you prefer to continue sourcing loans the way you have historically?.

We’ve seen obviously some of the activity, M&A activity in the space. We are actively looking at that, but given the captive relationships that we have, we’ve been pretty successful in acquiring those assets over the last two years, and especially in Q3.

I think our track record even during COVID, where people are distressed, we fulfilled all of our obligations then to fund any loans we had committed to. It’s given us a lot more credibility in the space, and I think we will be successful with or without M&A activity to still be able to source those loans and grow the portfolio..

Okay, got you.

Also to follow up on the question about the warehouse capacity for continuing to grow, from a capital perspective, can you maybe share your thoughts on how much room you guys have to keep adding assets to the portfolio growing in 2022 before you may potentially need to look at raising additional capital?.

Sure. We have north of $300 million of cash on balance sheet, and that number’s been hovering pretty high post the pandemic. We have significantly brought down our recourse leverage, down to one turn of recourse of leverage, so between cash and unencumbered assets, we have plenty of capital to grow the portfolio.

We just want to be judicious in making sure we find the right opportunities. The first half of the year, our focus was on optimizing the liability side - that remains the key theme for Q3, but we were able to successfully add a mortgage with assets to the tune of $850 million.

With taper expectations potentially later today from the Fed, inflation that doesn’t seem to be transitory, and the potential high rate environment is potentially a spread widening environment, we think could create some opportunities to deploy the excess liquidity we do have on balance sheet in Q4 and as we enter 2022. .

Okay, got it.

Last thing, on the loan spread tightening you mentioned, which obviously impacted 3Q book value, have you seen that continue into the fourth quarter or would you say it’s sort of flattened off, and could you give any commentary on ?.

Yes, our expectation was given sort of the quick move in rates to start Q4, coupled with a little bit of softening on the new issue front, would have led to some widening in the loan trading.

There was actually a GSE loan sale by yesterday, don’t have full color yet, but again I think those loans traded extremely well, so really haven’t seen a softening on the loan trading side as we have seen on, again, some of the securities side as we head into year end. I don’t think that’s a long term trend.

I think, again, given the vast move in rates, the expectation of higher rates, that made people a little nervous after a pretty successful 2021, so I think that could be, again, a transitional thing.

But there is a dearth of cash on the sidelines looking to be deployed within the mortgage space, so I think any widening should be just near term and revert back to where it has been for the better part of 2021..

Okay, that’s helpful. Thank you. .

Thanks Trevor..

Once again, that is star, one on your telephone keypad. We’ll move next to Doug Harter of Credit Suisse..

Thanks.

Can you just talk about kind of what changed in the market, was it your appetite or was it more supply that led to the increased activity in the quarter?.

Our appetite has been, as we’ve highlighted on numerous calls, been pretty strong for seasoned reperforming loans, we were just not as competitive as we would have been in the first half of the year.

I think some of the counterparties that we engaged with in Q3 were not your run-of-the-mill traditional sellers, so we were able to successfully negotiate transactions with less sort of , if you will, and that’s where we’ve had the most success..

Got it.

Any insights or share your thoughts as to whether that continues, or is it more likely to be a competitive bidding process in the coming quarters?.

I think, again, those opportunities that are a little more quiet, few and far between, but we think some will still come to the forefront just given how strong loan demand is. I think, as I just highlighted, if there is a slight widening, that people could pull back.

It’s been a pretty active year, so we were hopeful to take advantage of that, given that’s been sort of our core focus and strength and we’ve differentiated ourselves in that space from others. .

Got it.

How do you think about the--on the reperforming book that you have, where you would see the current mark-to-market LTV on the book, given the strength of home price appreciation over the past year-plus?.

Sure. As we’ve mentioned in our opening remarks, year-over-year Case-Shiller was up about 20%, the highest in 30-plus years. I think we touched upon this on the call as well, the amount of re-securitization activity we’ve had this year, a lot of the loans acquired in 2016 and ’17 had LTVs in the mid to high 80s.

Those LTVs refreshed and we have done the re-securitization closer to mid 50s, and they have come down quite significantly. I think that would be where I would say the overall portfolio’s LTV is, adjusted for home price appreciation and amortization in the last three, four years, probably mid, high 50s on the aggregate..

Great, thank you..

This does conclude our question and answer session for this morning. I’d be happy to return the call to Mr. Mohit Marria for any concluding remarks..

Thank you Leo, and thank you everybody for participating in our call, and we look forward to talking to you again next quarter. .

This does conclude today’s Chimera Investment Corp Q3 2021 earnings call. You may now disconnect. Everyone have a great day. .