Chimera Investment Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation first quarter 2020 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's 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, please press the pound key. We ask that while posing your question, you pick up your headset to allow for optimal sound quality. It's now my pleasure to turn the floor over to Emily Moore of Investor Relations. Please go ahead.

Thank you, Holly, and thank you, everyone, for participating in Chimera's first 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 on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the Risk Factor 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 President and Chief Executive Officer, Matthew Lambiazzi. Please go ahead.

Welcome to the first quarter earnings call for Chimera Investment Corp. Joining on the call this morning is Mohit Maria, our CIO. Rob Colligan, our CFO, Chandra Yarladiga, our Chief Operating Officer, and Vic Falvo, the Head of our Capital Markets. We'll make some brief comments, then open up the call for questions. I'd like to start by saying that all the employees at Chimera are healthy and working remotely from home. We implemented our contingency work plan in early March and have not experienced any significant technology issues. We all hope that you and your families stay safe and healthy as well. In the month of March, the COVID-19 pandemic created an environment of fear and extreme uncertainty, resulting in near catastrophic conditions for the fixed income markets. Many investors felt that the government-mandated lockdowns would likely bring an economic recession, and they sold their credit investments while reinvesting into safer risk-off assets such as T-bills, U.S. Treasury notes, and cash. Credit-focused bond funds and ETFs saw record outflows. forcing fund managers to sell their holdings into thin markets, creating heightened volatility and market dislocations. All sectors of the fixed income market, apart from U.S. Treasuries, experienced sharp downward price movements. Some investors who used leverage as part of their strategies were also forced to sell assets as they attempted to meet margin calls from their repo lenders. Market conditions witnessed in March of 2020 were very similar to that experienced in the 2000 crisis. yet price movements were swift and occurred over a much shorter timeframe. The Federal Reserve was quick to respond, and on March 15th, a Sunday night, they announced many initiatives to combat the worsening of economic conditions. The federal funds rate was cut to 0%, new purchase plans for treasuries and agency mortgage-backed securities were implemented, and funding programs like the TALF and commercial paper facility were revived from the 2008 Federal Reserve playbook. The Fed's actions were largely helpful bringing order to many areas of the 16th market, including agency mortgage-backed securities. Liquidity programs for residential credit securities were not offered by the Federal Reserve, and they continued to trade in a challenged fashion in the secondary markets. Like the Fed, Congress also did its part by passing the CARES Act with the intent to help individuals most directly impacted by the COVID-19 pandemic. The US economy is vastly different today than where it was prior to the COVID-19 crisis. The abrupt shutdown in the US economy has swiftly created some of the worst economic problems since the Great Depression. In the past six weeks, 30 million people have applied for unemployment benefits, a sharp contrast to the three and a half percent unemployment rate that we had in February. Many US homeowners have decided to take advantage of newly created mortgage forbearance programs. In the near term, The government initiatives coupled with mortgage forbearance will soften the immediate load of the U.S. economy. But these may have lasting negative impacts on the housing and mortgage market should they persist for an extended period. Over the past several years, Chimera has taken a number of balance sheet initiatives that helped it in this difficult period to protect our book value, to meet all the margin calls from our repo lenders, and to pay our dividends. Our agency mortgage-backed securities portfolio has always served dual purposes. primarily as a source of spread income and secondarily as a source of liquidity rather than selling our higher-yielding legacy assets. This quarter, we sold our agency past two securities to pay down debt and further deleverage our overall portfolio. We ended the first quarter at 2.2 times recourse leverage, down 35% from year-end. Over the past decade, we have purchased or acquired approximately a $14 billion portfolio of lengthy non-agency securities, and season low loan balance mortgages. This portfolio is funded through securitization as well as repo leverage, but it has not been immune to downward price movements. We've worked diligently to protect this portfolio, which has historically been a consistent driver of earnings for our company and makes Chimera's portfolio differentiated in the mortgage REIT industry. We remain hopeful that at some point in the future, the pricing of these assets reverts to its fundamental value rather than the illiquid pricing we're currently experiencing. A restarting of the economy should be a good first step in the process, which we believe could lead to an improvement in credit spreads and a recapturing of our lost book value experienced in the quarter. In the last two months, we've been busy executing transactions on the liability side of our balance sheet. In March, Chimera executed two mortgage-secured decisions totaling $883 million. We've arranged over $800 million of longer-term repo facilities for our credit assets, and we issued $374 million of convertible debt, which further diversifies our liability and capital structure. While pricing is never ideal in a crisis, we are heartened to be able to access the capital markets. Looking forward, it's hard to have a clear view on how the U.S. economy is going to perform as it starts back up. We are in uncharted waters with regard to the high unemployment and severe changes in social habits. We would love to believe that we'll be back to a V-shaped recovery, but it's most likely going to take longer and be difficult to get back to where we were in February. The mortgage and housing market outlook will also be challenging in the very near term. Mortgage forbearance adds a high degree of uncertainty to mortgage credit, and we will be cautious until we have more clarity on the forbearance duration and the totals in our portfolio. Given all these complexities, earnings for the next few quarters will be difficult to predict until the economic conditions clarify. We will remain focused on maintaining liquidity, extending our financing terms, and keeping our credit portfolio intact. We are navigating through a very turbulent period, but we are very hopeful that the U.S. economy will recover and the mortgage market will return to more normal footing when the economy restarts and people get back to work. And with that, I'll turn it over to Mohit.