Chimera Investment Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation second 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, 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 Emily Moore of Investor Relations. Please go ahead.

Thank you, Nicole, 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 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. 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.

Good morning and welcome to the second quarter earnings call for Chimera Investment Corp. Joining me on the call today are Mohit Marya, our Chief Investment Officer, Rob Colligan, our Chief Financial Officer, Chaudhry Yarladiga, our Chief Operating Officer, and Vic Falvo, the head of our capital markets. I'll make some brief comments, then Mohit will discuss the changes in the portfolio, and Rob will then review our financial results. Afterward, we'll open up the call for questions. I believe the first six months of 2020 will go down in the financial history books as one of the most volatile periods in modern times. The U.S. economy went from excellent to dismal in the span of just a few months, and the financial markets, especially fixed income, experienced record volatility and record intervention from the government. In our space, many levered investors were caught off guard by the swiftly falling asset prices, and they were forced to sell at the low point of the market. Fortunately, Chimera was able to navigate through this difficult period by executing transactions, which enabled us to retain our high-yielding and unique mortgage credit portfolio. It's important to understand that it would be very difficult, if not impossible, to recreate our portfolio in the current low interest rate environment, and its retention affords Chimera the ability to pay a meaningful dividend, which we would not have if the assets had been sold. In the quarter, we took several actions that helped us augment our liquidity. We issued a $374 million three-year convertible bond. We entered into a $400 million three-year revolving loan facility arranged by Aries Capital, and we executed three new mortgage securitizations totaling over $1 billion, which significantly reduced our loan warehouse exposure and helped reopen the mortgage securitization market, which is a primary source for Chimera's long-term finances. Additionally, during the period, we negotiated longer-term and non-mark-to-market repo finance facilities for our mortgage loans and credit-related assets. We now have approximately 75% of our credit borrowings on longer-term facilities, and over 50% of them have no mark-to-market or limited mark-to-market arrangements. While these actions have had the short-term effect of increasing financing costs, we believe the benefits over the long-term are significant We've strengthened our balance sheet, enabling us to further withstand additional market volatility, continue to produce attractive spread income, and to make new investments when we see attractive asset opportunities. This position is enviable given the uncertain economic conditions and the low... continue to buy large quantities of assets to support the financial markets and the U.S. economy. We are presently witnessing the effects of these actions. The 10-year Treasury yield is now roughly 55 basis points, and a rate on a new 30-year mortgage tipped below 3% for the first time in history. Current market expectations are that we'll be in this low-rate environment for several years to come, and that the returns on all financial assets will be also low into the future. While the Federal Reserve's asset purchases have not been directly focused on residential mortgage credit, their purchases have started solidifying the markets and senior mortgage bonds have witnessed significant price appreciation. We would expect that over time, deeper credit subordinate residential bonds could see similar moves. Chimera's portfolio of higher yielding legacy assets should become ever more valuable as the Fed continues to buy assets and returns in the market become ever more scarce. Residential mortgage credit, due to the size of the market and the slow recovery of pricing, offers some of the best opportunities in the fixed income market. The economics for loan securitization continues to be attractive as the credit curve remains steep. Senior front-end bonds are well-bid, creating an opportunity to securitize loans and retain higher-yielding back-end subordinate investments. These subordinate bonds have high relative yield and the potential for meaningful appreciation should markets normalize. We've executed three securitizations in the period and retained the subordinate tranches from those deals. Looking forward, we believe that there will be ample supply of loans for sale from the GSEs and banks, and this supply will create opportunities for us to make new investments for our portfolio. Given the current low yield and low return environment, we think being able to create investments through securitization will allow us to continue to produce attractive results in this challenging market. While this has been a very difficult period to navigate through, we believe Chimera is well positioned for the future. We have materially reduced our exposure to mark-to-market risk on our repo financings, which should help us manage through bouts of volatility in the future. We have been able to retain our legacy portfolio of assets, which will allow us to continue to produce meaningful dividends for our investors in what may be an extended period of low interest rates. The retained portfolio also has the potential for book value appreciation if pricing returns to historical levels. And finally, we believe there are attractive opportunities currently available in the residential loan market, and we have a team and a history of being able to use securitization to successfully create high-yielding investments for our portfolios. And with that, I'll turn the call over to Mohit.