Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation Second 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.

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

Thank you, Bernie. And thank you, everyone, for participating in Chimera’s second quarter 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 upon 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 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 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, Vec. Good morning and welcome to the second 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 new Chief Financial Officer, Kelley Kortman, our Chief Accounting Officer, and Vic Falvo, our Head of our Capital Markets. After my remarks, Kelly will review the financial results and then we will open a call for questions.

This quarter, we continue to make significant progress towards optimization of our liability structure. For the six months of 2021, we successfully refinance 12 legacy securitizations, supporting more than $5.6 billion of loans.

The results of these transactions has lowered our overall cost of debt by approximately 245 basis points and we expect this cost savings to continue to benefit our shareholders in the future. The housing market continues to be one of the most robust components of the U.S. economic recovery.

The National Association of Realtors recently reported sales of existing homes at 5.9 million annual units for the median sale price of more than $363,000, up more than 23% from a year ago. Demand for single family homes remain strong, while the inventory of homes available for sales persists near record low levels.

According to Black Knight data and analytics in June, the national delinquency rate hit his lowest level since the onset of the pandemic, and is now back below the pre-great recession average. A 30 plus day delinquency rate was reported at 4.4% of outstanding loans down 42% on a year-over-year basis.

Strong demand for existing homes, home prices and lower delinquency rates provides strong fundamental support for Chimera large portfolio of seasoned low loan balance mortgages. Interest rates on government bonds experience of both planning moved in the second quarter.

Over the period the yield on 10 year treasury notes fell by 27 basis points, while the yield on two year treasury rose by 9 basis points. Interest rates on money market instruments including overnight repo remain near zero.

Investor demand for higher yielding and fixed income products was strong and spreads on credit products continue to print tighter. Accordingly, the Bloomberg Barclays U.S. Corporate High Yield Index ended the quarter at 3.75%. It's lowest yield ever.

Tighter credit spreads, coupled with low absolute interest rates have presented attractive market opportunities to refinance our existing securitized debt and secured financing at significantly lower costs.

As part of our continued call optimization strategy this quarter we called and refinance fixed SIM legacy deals representing more than 1.5 billion of loans. The new securitization successfully optimized our liability through the extraction of capital and lowering cost of debt.

Our April deals CIM 2021-R3 nr 3 on a combined basis at a total of 813 million of securitized debt supported by 977 million of loans. The combined advance rate was 83%, enabling us to extract 125 million of capital by lowering our cost of debt for these loans by 200 basis points to 2.12%.

Chimera retained 164 million of subordinate and IO securities as investment from these deals. New securitizations have a calendar called dates. These R3 financing will be called beginning April 2024. And the NR 3 financing is called beginning April of 2022. In June, we issued 546 million CIM 2021-R4.

The deal consisted of 464 million securitized debt, representing an 85% advanced rate and 1.97% cost of debt for these loans. The R4 freed up 98 billion of capital and provided cost savings of approximately 180 basis points. Chimera retained 82 million of subordinate and IO securities as investments.

The R4 financing has a calendar called it beginning June 2024. We have provided additional details on page eight of our earnings supplement to further assist you in the analysis of this quarter since securitizations. Securitizations has long been a cost effective and efficient financing vehicle for Chimera.

In the first half of 2021, Chimera three securitization activity enabled us to take capital, reduce the size and lower the cost of our outstanding credit financing. And in conjunction with this year, three securitizations we've also refinanced several of our outstanding secured credit facilities.

We have made meaningful improvements with the average cost of our secured financing for residential credit assets in the second quarter at 3.5% down from 4.9%, and year end. We've always been extremely prudent and diligent when making our long term investment decisions. Our agency CMBS portfolio is constructed with explicit prepay protection.

As interest rates have fallen and maintained near historic lows we have been active in managing our agency's CMBS to determine the best course of action between long term hold, gain on sale, securitization are reaping benefits through explicit prepay penalties.

This quarter through the combination of prepaid penalties received from our Ginnie Mae project loans and early paid out of non-agency credit we generated onetime non-recurring income of 38 million. Our prepaid penalties received this year is proof of concept for many of the positive convexity attributes we have regularly discussed over the years.

Now, at the midpoint of 2021, I believe we have made meaningful impact on our balance sheet.

We have re-securitized debt supporting 5.6 billion loans through seven separate securitizations, lowered our cost of securitized debt by over 245 basis points, lower the cost of our repo credit facilities by 140 basis points since year end, retired high cost debt and warrants incurred during the pandemic, issued three jumbo prime securitizations totaling 1.2 billion, purchased more than 200 million of high yielding fixed and flip loans and increase our quarterly dividend by 10% to $0.33.

Securitizations of loans lock and stable long term financing for our loan portfolio. We have successfully refinance many of our outstanding legacy deals and we have an additional five deals with 1 billion of unpaid principal balance that are will become callable over the next six months.

Looking forward, we continue to seek opportunities to further improve our liability structure. And as always stay the course as a patient long term investor focus on investments to provide our shareholders with stable book value and a sustainable and attractive risk adjusted dividend.

And will now turn the call over to Kelly to our financial results for the period. .

Thanks, Mohit. I'll now review Chimera's financial highlights for the second quarter of 2021. GAAP book value at the end of the second quarter was $11.45 per common share. GAAP net income for the second quarter was 145 million or $0.60 per share on a fully diluted basis. Our core earnings for the second quarter was 130 million or $0.54 per share.

Economic net interest income for the second quarter was 173 million. The yield on average interest earning assets was 7% for the second quarter while our average cost of funds was 2.6%, resulting in a net interest rate spread of 4.4%. Total leverage for the second quarter was 3.321 while our recourse leverage ended the quarter at 1.021.

For the quarter, our economic net interest return on equity was 19%. And our GAAP return on average equity was 18%. Expenses for the second quarter, excluding servicing fees and transaction expenses were 15 million, down approximately 3 million from last quarter. That concludes our remarks and we will now open the call for questions. .

Our first question from Doug Harter with Credit Suisse. Your line is now open..

Thanks, Mohit you mentioned the 38 million of benefit from prepays. Your presentation mentions the 21.

Can you just go into what that other 17 million is that you were referring to?.

Sure. So the 38 comprises of $21 million of agencies CMBS securities are recalled, that have the explicit prepayment penalties associated with them.

In addition to that, we had a handful of non-agency legacy deals that were called, not by us, but by other holders of color call rates and that led to an additional $14 million to $15 million of penalties that we received, or I should say, accretion, as opposed to penalties on the non-agency side.

And then some of the IOs that we hold up the Ginnie Mae project deals that were issued by third parties that was the other $2 million to $3 million that we received. .

You have handy kind of how that what that benefit from call of, has been in and prior quarters. .

So it hasn't been that, it's been more muted in prior quarters. We've never had anything of this magnitude in the past. And like I said, these were deals that were purchased very early on in 2009, 2010 at very deep discount, so it hasn't been a meaningful number. Otherwise, we would have pointed it out on prior calls. .

Great. And then just shifting to kind of the new investments.

I guess what areas do you see as most attractive today and what type of returns are you generating?.

So we continue to focus on the business purpose loans. We think that's a very attractive short duration asset that produces mid teens type of levered returns. We continue to grow that year-to-date as mentioned in the opening remarks. We've been successful in acquiring over 200 million.

We're continuing to expand our parties on where we acquire that but that's still a large area of focus for us. In addition the season three performance base as shown from the real leverage that we've done off of our existing deals.

So a place where you could optimize your equity financial holdings to a pretty decent level of returns as loans base has gotten crowded, there's been some new entrants that are pretty aggressive.

But as I've mentioned on several calls in the past, there's still a fair amount of loan sales that have to occur from the GSCs and other banks that will create opportunities in the future. I mean we've been extremely busy. We've done seven legacy season prime securitizations.

We've done three jumbo securitizations as and been bidding on loans unsuccessfully. But, again, we're optimistic that things will come our way and we'll be able to acquire investments in the future. We don't have to make any rash decisions given the liquidity and the earnings being driven by our current call strategy..

Helpful, thank you. .

And we will take our next question from Eric Hagen with BTIG. Your line is now open. .

Thanks. Good morning. I was hoping to get your perspective on how the expiration of the foreclosure moratorium impacts the portfolio and what the overall approach will be in extending any modifications to seasoned real performing borrowers around the pandemic including what percentage of the portfolio was still in a COVID related forbearance. .

So overall, the delinquency pipeline of our seasoned re-performing portfolio didn't really materially change prior to the pandemic to post-pandemic. Our 60 plus delinquency pipeline was around 9%. I think it may have inched up to about 10%. This reverted back to in that same context now around 9% on the aggregate.

As far as what we plan on doing on extensions or other strategies as relates to servicing, given that all of these loans are in trust we do not control the servicing within our governing docks and the PPM of these deals that we issue. There is a loss mitigation matrix that the players have to follow. And they have to do best practices on their own.

So we don't really have much control on the servicing of these deals on a go forward basis..

All else being held equal the expiration of the foreclosure moratorium should investors see that as an incremental kind of positive for the yield limit portfolio? Or does is it really kind of a neutral event?.

Honestly, I mean, we didn't see that much of a cash flow disruption. I mean, if you think about the portfolio composition, the average balance of our mortgage loan is under 100,000. The average mortgage payment is just north of $800 a month. So from a cash flow perspective we didn't see much change as a result of the pandemic.

But overall, the mortgage universe as highlighted in the opening remarks that delinquencies have come down moratorium should be a positive from a cash flow perspective, again given the strong housing appreciation that's been experienced over year-over-year coupled with continued low mortgage rates.

So anybody having challenges could potentially refinance or reset their rates lower to lower their payments..

Got it. And then one housekeeping item on the credit portfolio.

What's the LTV in the portfolio at this point, the loans held for investment of course?.

Loans held for investment, that LTV is probably going to be probably mid 80s. But that number is from the time those loans were acquired. Once we securitize those loans, we will update the BPOs and that number will probably go lower given again, the strong housing HPA..

Got it. Thank you very much. .

And we will take our next question from Bose George with KBW. Your line is now open. .

Hey, everyone, this is actually Mike on for Bose. Just on the funding costs today, because of your material, the 2.6%. I'm just wondering where do you see this going in near term maybe second half of 21. And then how does that relate to your expectations for run rate core earnings. .

I mean, we've made both on these securitize debt side, the financing costs have come down quite significantly as well as on our recourse borrowing just given the low level of rates and the dealer appetite to finance those assets.

I think on the recourse side I don't really see much more improvement that could really take place given where spreads are. But again it depends on the amount of cash sloshing in the system, which at the moment is plentiful.

And the securitized debt side we still have five deals between now and year end that are callable totaling $1 billion of UPV and if you look at the supplement the last page of the supplement, it highlights the deals that are callable the amount of balance or secured debt that's outstanding there.

So I think that could still drive earnings on the back half of the year. Now, if you look at where that debt is issued relative to where we've been able to get some deals done, it could be north of 100 basis point reduction and financing cost on those deals..

Great. That's helpful color and then just one more for me. How is books quarter end. .

So book value since -- of the market valid spreads have been pretty sticky. So I would say unchanged to where we ended June 30..

Great. Thanks for taking the questions. .

And we will take our next question from Trevor Cranston with JMP securities, your line is now open. .

Thanks, good morning. On the income you guys got from the legacy bonds being called this quarter. I was curious if there's any particular reason you guys would point to as to why some of those deals started to be called this quarter in particular.

And if it's something that was widespread across counterparties, or if there's maybe one particular counterparty in the market or something who's calling some of their legacy deals. Thanks..

Hey good morning, Trevor. As it relates to who's calling the deals I'm not really sure who owns the call rights on these transactions. But it was its across shells, it across different issuers on the legacy side that deals are got called.

Again given how strong the new issue market has been and the securitization markets been it is an attractive time to call deals and issue new debt especially on top of where the new issue market is just where loan pricing is also supportive of deals getting called.

So I'm not surprised this activity has been taken place since 2008, 2019 slowed down meaningfully in 20 as a result of just COVID, as well as forbearance moratorium, but as those as highlighted on the earlier question go away we do expect them to pick up but it hasn't been that meaningful in prior quarters and we highlighted at this time just the amount of accretion that we did realize.

.

Yes that makes sense. And on your legacy non agency portfolio.

Do you have the number handy in terms of how many of those deals you think are callable at this point? Is it pretty much all of them or is it?.

I don't have a number handy, but I'll spit ball it at around probably north of 80% and if you look at the legacy that we hold those securities were issued back in 2006, 2007, and 2008. Most of those deals of either 10% to 20% cleanup calls.

And given we are now 13 years into the issuance of those securities, I would expect a lot of those have factored down to where they could be callable today but again, on an aggregate portfolio number, if I had to put a number on it I would say around 80% of our legacy assets are probably callable. .

That's very helpful. Thank you. .

And we will take our next question from Stephen Laws with Raymond James. Your line is now open. .

Hi, good morning Mohit..

Morning. .

The portfolio is a little smaller. I know, there's a lot of competition out there. And we've just discussed with Trevor and others the call activity that seems likely to take place.

Can you talk about any other asset classes you're watching that seemed to fit the investment mandate you like from a credit standpoint? Are you really think you're going to continue policy, narrow focus, but just focusing on the same line of assets you've done historical. .

I mean, both from an investment standpoint, we look across the full gamut of stuff available in, as well as commercial. We've participated in the season re-performing space. We've done prime jumbo deals. We've done agency eligible investor deals, and we're focused on growing the business purpose loan portfolio.

So it's across the gamut and like I said, where we think best relative value opportunities exist is where we want to deploy capital. The space have gotten crowded in the past. And we've been patient and still picking small pools up here and there. But in addition to the season reperforming loans that we've done, we have done three jumbo deals.

And we that market, as highlighted on prior earnings call is one that's interesting where at times, there is a great ability to securitize and times that widens out and in a vacuum and create a challenging environment to issue those securities. But the way we've structured the business. I think we want to be involved.

We want to be repeated where, as shown with the deals we've done, and I get that going forward, still optimistic on acquiring loans and continuing to use securitization to finance those vehicles. .

Great. Thanks for the color there. And the follow up question earlier around LTVs. If you take the older vintage loan, the reperforming loans and look at I don't know, mark to market LTVs based on home price appreciation you guys looked at that math and kind of where does that number shake out given current home prices. .

We have and I'll touch upon this though as mentioned, we've called 12 legacy deals totaling $5.6 billion given that those were relevered into new securitizations. When we completed new securitizations we got to update in BPOs. That 5.6 billion of loans in the prior securitizations, which were issued in 2016, and 17, had LTVs in the mid 80s.

When we refresh the BPOs, the new LTVs based on amortization, over the last four years, coupled with home price appreciation was in the low 60s. So it's been a meaningful drop in LTVS both due to amortization and home price appreciation.

And if you transfer that to the rest of the asset that we owe and we would expect to see a similar trend down in LTVS. .

That's great color. Thank you for that the numbers there. And then one, just one touch up. I think it was mentioned, expenses were down about 3 million sequentially.

Is that due to seasonality around some stock vesting in Q1 or was there another impact for the sequential decline?.

It was all comp related just a correction of that Q1 from stock vesting, which didn't reoccur in Q2. .

Fantastic. Thanks a lot. Take care..

And I will now turn the program back over to Mohit for any additional or closing remarks. .

Thank you and thanks, everyone for joining us on our call. We look forward to speaking to you on our Q3 earnings call. .

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful day..