Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation Fourth Quarter and Fiscal Year End 2020 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 to begin..

Thank you, Laurie. And thank you, everyone, for participating in Chimera’s fourth 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..

Thank you Vic. Good morning and welcome to the fourth quarter 2020 earnings call for Chimera Investment Corporation. Joining me on the call today are Choudhary Yarlagadda, our President and Chief Operating Officer, Rob Colligan, our Chief Financial Officer and Vic Falvo, our Head of our Capital Markets.

After my remarks Rob will review the financial results and then we will open a call for questions. Before we begin in November we announced the retirement of Matt Lambiase. Matt founded and led Chimera since 2007. Under his leadership Chimera grew to a $3.8 billion mortgage REIT and paid more than $5.2 billion in dividends to shareholders.

Matt was a great leader, friend and mentor for everyone in our company. We want to thank him and we all wish Matt the best of success in his future. This quarter Chimera continued its path for book value reappreciation.

Throughout the year we worked diligently on the liability side of our balance sheet to enhance liquidity and strengthen our cash position. These actions enabled us to retain our high-yielding credit portfolio and benefit from the improvement in asset prices that started in the second half of 2020.

Chimera's book value improved nearly 4% in the fourth quarter and over 16% since the middle of the year. This improved book value combined with the company's dividend policy has generated a 6% economic return for the fourth quarter and a 22% economic return since June 30 of 2020. The housing market is robust across America.

The Federal Reserve has been very supportive of agency mortgage-backed securities with open market purchases for its own portfolio. The Fed's purchases have helped lenders offer low mortgage rates to homeowners for new home purchases as well as lowering the cost of home ownership for those that desire to refinance.

The National Association of Realtors recently reported that in December contract closing for existing homes increased to an annualized pace of 6.76 million units. This is the strongest pace we have seen since late 2006. Housing inventories are low, demand is strong and mortgage rates are at all time historic lows.

These are all indicators for continued performance in the housing and residential mortgage credit..

Thanks Mohit. I'll review Chimera's financial highlights for the fourth quarter and full year 2020. GAAP book value at the end of the fourth quarter was $12.36 per share and our economic return on GAAP book value is 6% based on the quarterly change in book value and the fourth quarter dividend per common share.

GAAP net income for the fourth quarter was $129 million or $0.49 per share and $15 million or $0.07 for the full year. On a core basis net income for the fourth quarter was $72 million or $0.29 per share and it was $334 million or $1.46 per share for the full year.

Economic net interest income for the fourth quarter was $117 million and it was $513 million for the full year. For the fourth quarter the yield on average interest earning assets was 5.9%. Our average cost of funds was 3.6% and our net interest spread was 2.3%.

Total leverage for the fourth quarter was 3.6:1 while recourse leverage ended the quarter at 1.2:1. For the fourth quarter our economic net interest return on equity was 12.5% and our GAAP return on average equity was 15.8%.

Expenses for the fourth quarter excluding servicing fees and transaction expenses were $18 million up slightly from last quarter. That concludes our remarks and we'll now open the call for questions. .

Thank you. Your first question comes from the line of Bose George of KBW. .

Hey guys, this is actually Mike on for Bose.

So my first question is I was wondering if you could just talk about maybe where you're seeing the best opportunities to deploy capital between RPLs, jumbo investment property? Last quarter you mentioned season RPLs is that still the best of the case?.

Hey Mike. This is Mohit. Thanks for joining us. Yes, I mean season re-performing has been the core strategy for the company since 2014.

It still offered tremendous value in the loan upside from just mitigated losses given the strong housing fundamentals coupled with how strong the new securitization market is and where you're able to achieve term financing. So we think, we still think the back end pieces that you would retain offer tremendous value..

Got you. And then I think last quarter you mentioned that the cash yield on RPLs is still high single digits. So when I look at some of the recent maybe RPL sales, it looks like everything's pricing above par.

So I was just wondering if you can maybe walk through the math to get to that high single digit yield if that's still the case?.

Yes, I mean yields on most things have come in as you just mentioned and alluded to the GSE sales that took place in Q4. Spreads have come in quite meaningfully and most of loan packages in the RPL space are trading at par or above par but at the same time on the new issue side spreads have also come in quite significantly.

On the rated side you could affect a securitization at the AAA level at 60 basis points.

So your back end returns and that probably represents about 70% of the capital structure and as you go down to the investment grade stack which probably gets you to an advance rate of 85%, you're looking at an all-in blended execution around mid high 100s to swaps on that basis.

So like I said your back end returns won't be high single digits anymore. Probably would be mid-high single digits as if as all other spread products have come in but with some leverage you can produce double digit returns on that retained piece..

Great.

That's helpful and then on the business purpose loans, can you just maybe talk up through the some of the economics there and the math with regards to the asset yield and ROE because I just assume that if you're not originating those loans again on sale margins are must be pretty high right now?.

Yes.

So on the business purpose loan fund, I mean our portfolio and we've been focused on going that portfolio it's at $200 plus million now as given the short duration nature, I mean we have a lot of pay downs on a monthly basis but the gross coupon on the originations is probably just under % and servicing fees and asset management fees you're probably looking at a six little over 6% coupon on a net basis with price execution just around par or slightly above par..

Great. That's helpful and then just one more on the buyback. You increased the authorization of 250.

Can you just remind me what was the previous authorization?.

Sure we had 150 before..

Got you.

And how much is currently available?.

So 228 million we used 22 million last year..

Okay. Great. Thank you so much for taking my questions. I appreciate it..

Thanks Mike..

Your next question comes from the line of Doug Harter of Credit Suisse..

Thanks.

Mohit or Rob, can you guys walk through kind of what your cost of financing was on the securitizations you did in the quarter? Can you just compare that to what the cost of the financing that was being replaced was just to get a sense of the change?.

Sure. Hey Dough this is Mohit again. So the securitization we did four securitizations the 2020-R6 was not a re-lever. That was just loans we had acquired at the end of September that we put right into a securitization in early November so and the cost of funding there on a term basis as we said was around 2.19%. The re-lever that we did was CIM 2017-8.

We saved based on the re-lever about 100 basis points in cost savings. We issued debt as I said around 2.22% with an 85% - 86% advance rate. So prior to the re-lever it was over 3.2 or 3.25 roughly..

Got it and on the deals that you said are either callable today or callable in ‘21 assuming securitization markets kind of stay where they are would you expect comparable amount of savings?.

So I will give you some stats here. So of the 16 deals have become callable that represents roughly $6 billion or $7 billion of UPB with current sec debt that's associated with that of $4.8 billion.

That debt has a current yield of 4.27% and as I mentioned earlier we think in the new issue space right now, you could issue non-rated securitizations somewhere between 2 to 2.5 depending on the collateral profile and the advanced rates that you're willing to get.

So it's actually going to be a bigger number than what we were able to achieve on the 2017-8 re-lever..

That's helpful. And then you also mentioned that kind of as opportunities present themselves you have the ability to increase leverage.

Can you just help size that and kind of how you or how we just think about that opportunity?.

Yes. I mean if you if you look at the core focus of the company which is the season re-performing space, the GSE took a pause during the pandemic last year and picked up the pace of selling in the back half of the year. We think they're still behind schedule and the portfolio has grown as a result of the pandemic.

So on the season re-performing side they're still north of 100 billion of loans that'll need to be disposed of from the GSEs probably between $18 billion to $22 billion on an annual basis. So that's still a primary source of collateral for us.

There are also some funds that will probably liquidate some assets, some banks given where pricing has come as we just alluded to. A lot of that space is now at par or in some cases above par.

So again there is a robust pipeline of loans that will become available for sale today or over the course of 2021 and given the strength of the new issue market and lack of legacy assets available we think spreads there will remain at these levels which is almost approaching the all-time tights from an issue and standpoint.

So the term fancy markets are pretty strong. The yields have come in on the underlying loans but on a structural leverage basis coupled with some limited recourse leverage you can still produce double digit returns..

Yes. Hey Dough this is Rob. Yes. Just to add there.

If you go back a year, a lot of our thesis or plan for last year was to resecuritize reduced funding costs and obviously COVID-19 pandemic and other things put a lot of things for many companies on hold but going into this year we have additional deals to re-lever and the securitization market is very liquid and the cost is low.

So I think we're pretty optimistic about 2021..

Great. Thank you..

Our next question comes from the line of Eric Hagen of BTIG..

Hey good morning. A couple of questions.

Can you talk about how you're hedging the CMBS portfolio now and any tweaks or additions you've made since year end and maybe just how you like that as a source of liquidity relative to agency pass-throughs? And then on the portfolio of callable securitized debt, can you frame just some of the factors that drive the decision to call? And maybe more importantly as you complete incremental deals can you talk about your appetite to lever the retained piece? Thanks..

Hey Eric. Let me start with the agency CMBS question. So as of Q4 we still had no hedges on that book and we currently have not changed that in Q1 as well even with the market having sold off 25 basis points on the 10-year.

If you go back to the weighted average coupon on our agency CMBS book, it's north of 4% and given how much the market rallied from 2019 to 2020 based on that coupon, based on the duration of those assets the implied price would be in the mid high teen.

So it'll be around $116 to $117 price and given the prepaid protection that's exhibited in these assets with a hard prepaid penalty in most cases of 10 years, the prices are sort of artificially capped around that 110 to 112 area depending on the loan that you're looking at.

So with the market selling offs as it did even in Q4, the price of our agency CMBS portfolio was unchanged sort of leading to spread tightening that most other spread products also witnessed, I think a similar trend is sort of being witnessed in Q1 so far. So, yes. We have no hedges on at the moment.

We are keeping an eye on what happens to the 10 year given sort of the duration sensitivity of the portfolio but we think there is still some spread tightening that could occur within that product. So we think the cost of hedging is not just needed at the moment.

As we will go into your second part of the question on the call and re-lever strategy as I mentioned we have $4.8 billion of debt at a weighted average cost of 4.27% and if you look at where we could issue new issued debt that is a big determinant on when and how frequently we would call those deals subject to market conditions of course In addition to that 4.8 billion of debt relative to the 7 billion of collateral that's underpinning it represents roughly a 68% advance rate on UPB and based on market conditions and the performance of that collateral in addition to reducing the cost of debt we will also be able to take out equity because we think we'll probably be able to sell an effective 80% to 85% advance rates on new securitizations generating more capital to deploy into new attractive investment opportunities.

.

Right. Sorry go ahead..

I was going to say it's going to be both a cost saving on term financing as well as a potential takeout for equity..

Got it.

I was hoping maybe you can give some thoughts or guidance around your appetite to lever the retained piece as you complete those deals this year?.

I mean, I think with where our leverage is at 1.2 times on a recourse basis coupled with a large cash position that we have and a large unencumbered asset position we have we're pretty comfortable financing the back end pieces but unlike prior to the pandemic, I mean we're working on strategies to have either non-mark-to-market or limited mark-to-market on those finances on a go forward basis.

We were always focused on having the balance sheet on a mark to market basis but in addition to having committed balance sheet we also want to focus on making sure that we could finance these with limited mark-to-market or like I said or non-mark-to-market basis..

Right and as the market has come in and tightened, is there any appetite or ability to pay down the line that you got from areas last year and essentially refinance it into lower cost non-mark-to-market term funding for the retained pieces?.

Yes. I mean, I think that's another tool like our focus as it was in the better part of 2020 remains on the liability side both on the securitizations that we have callable and the cost savings on those coupled with just our repo borrowings.

I mean if you go back to December of ‘19 the cost of financing on our credit portfolio was 3.19% as of end of Q4 2020 the cost of borrowing is at 5%. Now obviously in times of crisis borrowing money was expensive but we borrowed it for a short time and we could have the ability to refinance that.

So coupled with the securitizations even our repo borrowings have meaningful upside to potential earnings for the company in 2021..

Got it. Great. Thank you very much for the comments. .

Thanks Eric..

Your next question comes from the line of Trevor Cranston of JMP Securities..

Hey thanks. Good morning.

First question Rob, I was hoping maybe you could take us through kind of what the main drivers were of the $0.04 decline in core EPS from last quarter to this quarter and then the second question sort of in light of where earnings are and the compression that has been on new investment spreads, can you guys maybe just provide some general thoughts around how you guys are thinking about dividend heading into 2021? Thanks..

Sure Trevor. Thanks for the question.

Going from last quarter to this quarter we have had some portfolio paydown but I think one of the bigger drivers and we may have touched on this in last quarter's earnings call on the CMBS side we did have a number of prepayments on that portfolio where we’ve received penalties those have lockouts and some yield maintenance provisions on them.

So if they do pay off early we do receive some prepayment penalties. So we had a little bit higher than normal if you looked at the yields on CMBS in particular last quarter they were almost abnormally high versus this quarter, it got back to a normal sledding. I don't think we had very many if any paydown.

So I'd say last quarter was a little bit higher in that regard versus this quarter and then going forward I think we're looking at it but obviously have opportunities to reduce some of our liability costs. On spread compression maybe Mohit can --..

Sure. Yes. Second part of your question about how we think about dividend given sort of the compression and yields experience, the good thing as we stated in our opening remarks is we have a pool of assets where we could optimize the financing.

As I said we have $4.8 billion of sect debt at a current basis of 4.27% so to drive and maintain our dividend that cost base is going to go down over 200 basis points.

So on $4.8 billion you're going to save 200 basis points on a go forward basis will drive the earnings power of the company for 2021 and beyond and as I just alluded to on the recourse repo side on our credit borrowings we're at a cost of funds of 5.03% and given how flush that market is with cash that's another source of reducing our cost and driving earnings in 2021 and beyond.

.

Okay. That's helpful. And then historically you guys portfolio has paid off quite slowly. I was wondering if you could provide some color around sort of how prepay speeds have progressed over the last several months and what the outlook is for that going forward? Thanks..

Yes. I mean the uniqueness of our portfolio is just that what I think, if you look at our credit portfolio which is our largest position, prepayments have remain flat throughout the pandemic. I mean if you looked at Jan prepayments they were around 9-10 CPR and if you forward to Jan 2021 speeds remain consistent around that 9 to 10 CPR basis.

These borrowers have been in the money but due to the credit impairment nature of their credit standings it just hasn't changed and we don't expect that to change in 2021 either..

Okay. Great. Appreciate the comments. Thank you..

Thank you. I'll now return the call to Mohit Marria for any closing comments..

Thank you all for joining us on our Q4 earnings call and we look forward to speaking to you on our Q1 earnings call later this in May. Thank you..

Thank you that does conclude the Chimera Investment Corporation Q4 2020 Earnings Conference Call. You may now disconnect..